Karl Beus:
Okay. It's 4:02. We should probably kick this off. I want to be respectful of people's time. Thank you all who have joined us for this webinar today. Grateful that you could attend and be with us, and we're happy to be with you. We're talking today about helping businesses navigate and neutralize financial distress arising from the COVID-19 pandemic and the related government countermeasures. It's a big topic, and we're covering a lot of ground that's complex, and we have limited time, so it's going to be an overview. We'll talk at a high level. Certainly, there are some specific situations we will discuss, but the discussion today is really going to be an overview of the COVID-related distress type issues that we and our clients are encountering and some of the strategies that can be employed to manage and hopefully neutralize some of that distress. We're talking mainly from a commercial contracting and a finance perspective today. That is we're not going to discuss, for example, labored employments, which is a big part of this as well.
Karl Beus:
I'm joined today by Mara Cushwa who's the head of our real estate practice, Gus Kallergis, the co-head of our bankruptcy and restructuring practice, Ann Seger, my partner in the commercial finance group, and I'm Karl Beus, and I'm the head of our combined commercial and public finance group. So, I guess with that introduction really, the COVID-19 epidemic and the impacts on business, I think, are fairly well chronicled. I don't think we need to spend an awful lot of time talking about what they are, but I will ask, Gus, really just as an insolvency and distress lawyer, really, what are you seeing out there in companies and dealing with their own distress, I guess to start? How is that manifesting itself? Just give us a few comments on that just to take it off, if you don't mind.
Gus Kallergis:
Yeah. I'm happy to, and I guess one thing I would start, and I think, Karl, you said this in your intro. I mean, the primary focus of this panel is to address the distress that is a direct result of the current pandemic. Obviously, there were plenty of companies that were in distress prior to the pandemic that have their own individual problems that require specific solutions for them, but right now, we're really kind of talking about that situation where you've previously had a healthy business in a relatively strong economy that is now experiencing some kind of business disruption. The government ordered shutdown of non-essential businesses, the impact of social distancing measures, and what the new business normal is.
Gus Kallergis:
I kind of look back at this to back in 2008, 2009 when we had the Great Recession, and the questions that I was addressing at the time as a restructuring and insolvency lawyer were, well, how do you restructure a business that loses 30 or 40% of its customer base without any real fault of its own? That's analogous to what's happening now, right? You have, out of nowhere, business who were healthy, suddenly, they have no customers, or what happens under the current norms when you can't operate efficiently. I think what you're seeing is for a company, its own distress, I mean they're feeling pressure on both sides because of how interconnected the economy is in businesses. Their customers are in distress, so they're slowing down payments to them. Their vendors are in distress and potentially having a shutdown, and so you have all this supply chain interruption that's occurring that's impacting just their operations, their ability to get product out the door and get cash in the door.
Gus Kallergis:
So, when you have that, I think what we're seeing is it's systemic in many industries. Think about all those industries that have now had their kind of world turned upside down from, all intents and purposes, no fault of their own or no fault in the way that they were operating, whether it's hospitality and travel. I'm representing a franchise, a hotel franchisor in a bankruptcy, one of its franchisees, and they're down ... Their occupancy rate is somewhere between six and 15%. How do you operate a hotel in those circumstances? Think about retail, and they were getting hammered before, but obviously, J. C. Penney has filed, J.Crew has filed, and it's bringing to light problems that are in this industry generally, but they're only accentuated and accelerated in part because suddenly, you just don't have the foot traffic. Your discretionary spending doesn't exist.
Gus Kallergis:
I was reading earlier today that commercial transportation has dropped somewhere between 20 and 40%, and so, what you see you ... Again, think about the live music, sporting events, all those things. This is touching everybody on every side, and so, when you have this global supply chain disruption, you have different inflection periods, various times and strategies for how the economy is going to reopen, you can see that companies are going to try to address their individual issues as they pop up. It's not surprising that you may turn around and say, "Okay, I'm not going to be able to perform under my supply agreement. I'm not going to be able to produce that product and sell it. I may not be able to pay for a product that I purchased in time. I may not be able to provide those services."
Gus Kallergis:
So, the places that we're seeing the distress that I think you normally begin to see it, again, are the supply agreements and your service agreements. You hear, and Mara's going to address this even more extensively, of tenants who are deciding ... commercial retail tenants or other tenants who are deciding not to pay their landlords. So, there are impacts in the commercial lease agreements. Then, similarly, I think this is coming across in your bank documents in other lending arrangements where you have an interest payment or other kind of loan payment where because you don't have the cash coming in, you're trying to decide where cash is going. So, again, I think what we're going to talk about here for the most part, at least in the beginning, is kind of the isolated impact of these individual breaches and dealing with a particular contract.
Gus Kallergis:
Now, it's clear that at some point, these could aggregate. Suddenly, you don't have a isolated situation that you're trying to address or the potential implications of that isolated distress, but maybe you're approaching insolvency, and that's something that requires a more comprehensive approach whether it's bankruptcy or other types of process. We'll talk a little bit about that towards the end, but again, I think we're looking at those individual commercial relationships right now. We want to focus on the impact and strategies for addressing those individual breaches.
Karl Beus:
Thanks, Gus. Yeah, I'm reminded of ... I was an English major [inaudible 00:07:55] in a former life, and I'm reminded of a quote from Hemingway's novel, The Sun Also Rises. One character asks another how he got in financial distress, and he says something to the effect of, "For a long time, very gradually, and then very suddenly," and that's normally how financial stress happens, I think, in most companies that I work with, but that's not what happened here. Here, it's all been very sudden, and it's systemic, as you said. I think that's one of the big differences really.
Karl Beus:
So, we're going to try and highlight those differences. So, we are going to talk about, for example, a situation. Let's start with the situation where, as a company, you're not going to be able to pay someone. You're not going to be able to perform under an agreement that you have. So, what do you do with that? Well, in normal circumstances, of course, you're going to look at that normal and ongoing circumstances. You would look at that and say, "Okay, well ..." One, you've got Gus's issue, which is the overall, why is that happening, but let's focus on the smaller issue for the moment. That is, what can I do about it in this contract? So, you're going to examine your rights under that contract. You're going to talk to the counterparty, or you're going to examine the counterparty's rights and trying to figure out how they might react. You're probably going to have some conversations with them. You might be try and work out a bilateral solution. All fair and good.
Karl Beus:
Now, you might do similar things in a COVID context as well, but there are other things that have come into play. For example, because of the systemic nature of it, you might actually, even if you have a breach under one contract, if it's a big enough breach or if you have a potential breach under eight or 10 of the contracts, that becomes a big issue altogether. Then, you might actually be bringing in some other contracts into play that you might not have thought about. We call that ... It could be a cross default situation or it could just be a breach of a representation or warranty under another agreement. A lot of times, we see these in your debt agreements or your commercial lease agreement. I guess, Mara, do you want to talk a little bit about that in a lease context?
Mara Cushwa:
Sure, Karl. Thanks. Drilling down to the specifics in the context of a default or non-performance under a commercial lease, we have to look at three essential questions. What are the operative documents? Who are the necessary parties? What did they, in terms of the operative documents, require? So, identifying the operative documents really helps us frame the question of whether we are dealing with a default under a single lease agreement or a single contract or whether we're dealing with that lease or contract executed in the context of a larger transaction. For example, you might have executed the lease in connection with a transaction wherein there are guarantees, there are subordination non-disturbance agreements, there may be other loan documents, and there may be a sublease involved. In that case, you're going to ... Understanding those operative documents is going to help us understand who are the necessary parties to the resolution to the solution to the discussion.
Mara Cushwa:
So, if you're considering a default situation where you're going to have a cross default, you have to consider the context of the default under that lease causing a default under your guarantee documents, and so, tenant has obligations to its guarantors. If there was a subordination non-disturbance agreement or other loan documents, the tenant not only has obligations to its landlord, but the tenant has obligations, as does the landlord, of direct obligations to the lenders. If there's a sublease, then the tenant may have obligations to landlord, its lenders, its own guarantor, and the subtenant.
Mara Cushwa:
So, knowing what the operative documents are and who the necessary parties are, are essential to understanding how we get to a resolution. Then, you have to drill down to those very specific terms of the operative documents. For example, the governing law in the context of commercial leases is that the lease agreement is the specific and negotiated agreement of sophisticated parties. It's typically going to be enforced in accordance with the terms, so then we need to look to the lease document itself and what are the events of default? What are the remedies? And what do they require? You're certainly going to have that non-payment of rent is going to be a default, but you should also look and pay attention to the fact that admission of insolvency or the institution of bankruptcy proceedings may also be a default not only under the lease but of the collateral and related financing agreements.
Karl Beus:
Thanks, Mara. Yeah. So, in addition to the defaults that you may have under lease agreement arising from ... Yeah. Well, I guess that's the point is you may have other defaults arising under your lease agreement from things that are happening in your business that you might not have thought about because they aren't really right to top of mind usually. Ann, do you want to talk about that in the financing context?
Ann Seger:
Yeah. So, on the same vein, I mean if you're unable to pay under one of your contracts, maybe you're considering stretching the payment terms or you just think, from a business standpoint, you don't want to make a payment under a certain contract, you need to carefully look under your credit facility. If that's considered a material contract, you might end up with a cross default. Oftentimes, credit facilities have a threshold amount related to the consideration there of the contract, so you need to be careful that you're not creating a cross default under your own credit facility because you didn't pay another contract. Also, oftentimes, leases are identified as material contracts depending on what the circumstances are, so making sure that, again, that doesn't trigger a default under your credit facility because you decided perhaps you don't want to pay under another contract.
Ann Seger:
The other thing you need to look at is oftentimes, credit facilities have covenants related to payment and performance under material contracts or leases depending on, a lot of times, if it's a asset-based facility, there's additional requirements to perform under various leases, depending on where your collateral's located, and then you also need to look at your reps and warranties. Number one, is this a not performing under this contract? Is that material enough that you are unable to make some of your own representations and warranties under your credit facility? Would this have a material adverse effect? You need to look at that. Then, finally, oftentimes, credit facilities require notices of certain ... If you receive a notice under a material contract, whether that's a notice of default or perhaps the counterparty is willing to work with you, but that's some other type of notice, oftentimes, you need to provide those notices to your lender, so being careful about what you're doing and how it interplays with your financing arrangements.
Karl Beus:
Interesting. So, what are you guys seeing out there among landlords, for example, and lenders in terms of how they're dealing with these defaults? Is there a recognition that this is based on something bigger than just an issue with the business or are people ... is there a leniency that we're seeing?
Mara Cushwa:
So, what we're seeing is sort of twofold. In Ohio, there are a couple of government-encouraged presumptions in favor of small businesses. So, the House Bill 197 and the Supreme Court's action on the same date of March 27th created like this very strong presumption that the government was encouraging delay in prosecution of evictions and protecting small businesses. On April 1st, the governor of the state of Ohio requested landlords consider suspension of collection of rents for 90 days and that lenders consider suspension of foreclosure actions for 90 days. So, there's this government-enhanced or government-encouraged presumption in favor of some leniency and consideration to small businesses.
Mara Cushwa:
I also see very specific actions being taken between landlords and tenants. The specific actions could include things like rent abatement, re-spread of rent, so to the extent that rent abatement is granted, you might permanently abate part of the rent, but then re-spread the rest of that, portion of that over the life of the lease. We've seen terms extended where the landlord is making itself whole by collecting rent over a longer term. We're seeing basically reformulations of rents, so you might decrease base rent and add a percentage rent, so that you're giving consideration to the tenant currently, but you're going to gain from the upside when the business rebounds, presuming that you can predict that with some degree of certainty.
Mara Cushwa:
Then, we're also seeing, on the flip side, we're seeing landlords require greater security deposits and additional guarantees. So, landlords are needing to consider and really should consider the long view in discussing remedy in this COVID situation with their tenants because you need to understand the specific tenant and its financial wherewithal, but you also need to understand the industry in the long view and whether any potential desirable tenant even exists. So, it may make great business sense to work with the bird in hand, the tenant that you have because there may not be a perfect alternative.
Ann Seger:
I think on the financing side, I mean, the lenders are obviously aware that companies are having issues from a liquidity standpoint. I think everybody is, at this point, I would assume given we're a couple months into this, I know that lenders are in close communication with their borrowers and really trying to help borrowers figure out, navigate this, and neutralize the effects as much as possible. I mean, I think it's something that if you think you're not going to make a payment under some other agreement that may be material, I mean, I definitely would encourage you to reach out to your lender and speak with them. If you can't make a payment under your own credit facility, which I know Gus mentioned a little bit ... I mean, we are seeing lenders give waivers for P&I payments. I mean, I think similar to what Mara said, I mean, maybe that under a lease that you might have an increased security deposit. I mean, I think that you might, as we'll talk about a little bit later, but you might be trading something for that.
Ann Seger:
So, I know some of the private credit lenders, for example, have been capitalizing interest payments that are not being made, so that's been added back to the principal, but you don't need to make it right now because it really is a liquidity issue as opposed to a long-term problem. So, I mean, I think the lenders are working with everyone, and I would just encourage closely talking with your lender if you think that you're going to be unable to make a payment under some other contract that may implicate your financing.
Mara Cushwa:
I would echo that that we are encouraging clients to speak early and often, landlords to tenants because the necessity is now in current, but there's a long-term view that can be very advantageous to all the parties, but in order to do that, you have to be really, really prepared for the conversation. Know the terms of your documents. Know your financial condition and what you're able to offer in the short term and in the long term, and then, be willing to be flexible and consider some alternatives, and then lastly but very importantly, make sure that you document all concessions and all agreements that are reached in modification of existing agreements.
Karl Beus:
Great advice, Mara. Yeah. I would say the same thing in the commercial contracting context. Good communication is key. Also, careful communication is key. In the commercial contracting context, for example, if you're dealing with the sale of goods, you have to be really careful about how you're communicating when you're in the vicinity of your own breach because in some ways, you can communicate that. By the way, if you're in breach, that's one thing, but if you're right and sort of near it and it's not clear that you're in breach or that you're in the breach yet, that's when you have to be really careful because you could, without intending to, be communicating that you are intending to breach the contract and that you are effectively and anticipatory repudiating the contract, which gives rights to your counterparty. So, you just want to be really careful about how you're communicating, and get some legal advice around that. Gus, did you want to talk a little bit more about commercial contracting and strategies for dealing with COVID-related breaches?
Gus Kallergis:
Well, I guess the one thing I would say is when you're dealing with your commercial contracts or any of your contracts or your relationships, yeah, you have to understand kind of what the power relationship is. With all of these things, that was a mixed question of a business issue and a legal issue because you may have legal options, but they may not be good options, or there may be things that you want to avoid, and so, again, having a strategy for dealing with your commercial contracts is important. Again, there could be a difference here between what you legally have the ability to do and whether or not you really want to do that, right? So, identifying relationships that are important to you, the areas where you're likely to have some leverage with your customer because they really need you, and maybe they can provide some support because they need the product you're producing.
Gus Kallergis:
Again, even with one of the things that Ann said, and I think transparency with your lender is generally very important but also kind of recognizing ... I was listening to a workout banker panel last week, and the one thing that I heard that makes sense to me is I think workout bankers and lenders are bucketing, are looking at their borrowers and trying to identify, "Look, is this really a COVID-related issue? Or is this were you already in trouble, and so that you're already a problem credit?" I think the tendency to give a little bit more leeway to those who are generally were healthy before versus those who were already struggling, I think that continues to exist. Again, I think it's identifying those individual relationships but then also recognizing when potentially, you've got a bigger problem where you need to treat your creditors in a collective manner, and again, that's a case-by-case, industry by industry basis depending on what you need to do and what you hope to accomplish.
Gus Kallergis:
For those situations, I think if people are approaching that and whether you think that you're about to become insolvent, you're not going to be able to pay your debts as they become due generally, not just in the short term, I think it's really important at that time to start thinking strategically and maybe contingency plan a little bit more. We can talk about that a little bit more later.
Karl Beus:
Thanks, Gus. Yeah, so those are some good thoughts around seeking a bilateral or possibly, as Gus alluded to just a moment ago, a multilateral solution with your counterparty or counterparties. Now, one of the interesting things about the COVID-19 situation and the distress is that I hear the word force majeure more in the past three months than I have in my entire career before that. So, there's a lot of noise around force majeure and doctrines of impossibility or impracticability or frustration or purpose, so I guess, are you guys seeing those? Mara, are you seeing that in the commercial lease context? How does it play out in the COVID-19 context?
Mara Cushwa:
Yeah. We see it frequently. So, the doctrine of force majeure or superior force is a concept born out of contract law. You commonly see force majeure provisions in commercial leases, property purchase agreements, construction contracts and the like. Force majeure typically defines events beyond the parties' reasonable control, which may provide permissible temporary delays in performance under the contract documents, but importantly, force majeure is not an entire ... it does not entirely excuse performance, so parties need to be aware of that. The more sophisticated the lease or the contract, the more detailed the force majeure provisions will be, so even if an event of force majeure type provision is included in your contract, it may excuse some but not all performance obligations. Frequently, it does not excuse the non-payment of rent, so in many commercial leases and other commercial contracts, the payment of rent is absolute. Karl, do you see force majeure in other commercial contracts?
Karl Beus:
Sure. It's in a lot of commercial contracts. It's generally not in financing agreements for the reason that you mentioned, that the payment, the obligation to pay money is not viewed by your lender as something that is negotiable depending on whether there's been a superior force. That money is owed, and it's to be repaid. So, the provisions, for the most part, don't even exist in credit documents. Now, in commercial contracts, it does exist. I think there's general agreement that, in fact, a global pandemic and the government countermeasures that shut down business to the extent that you can tie those and to the extent that you can create a causal connection between those and the distress you're having in your business, that would typically meet the definition of force majeure in most contracts, but it's not always that easy to create a causal connection though. As Mara said, it's dependent wholly on the language of the contract, and so, you need to look at the contract and decide what it says.
Karl Beus:
Now, that being said, we are seeing a lot more cases now, as I mentioned, of people asserting force majeure, but in my experience, they're not ... Nobody's, yet anyway, nobody's litigating the issue or insisting on the issue. I'm seeing it more as part of the conversation really. We think we're obviously dealing with all sorts of COVID-related stress, and by the way, we think this meets the definition of force majeure, so we think our obligations should be excused for the period of the force majeure. Then, the counterparty reacts to that, and it becomes a [inaudible 00:28:21]. Gus, do you see anything different than that or ...
Gus Kallergis:
No. I think that's right. I mean, I think in all of these things, and that's one of the things I alluded to before is that just because you have a legal right doesn't mean that you want to exercise it or you wanted to ... Oftentimes, the goal of a lot of this is to get people to the table to talk because everybody's experiencing this. Like I said, just like you're sitting there potentially with a desire to stress out your payables, your customer is doing the same thing to you and their customer. It's a chain that just keeps going up and down to everyone, and so finding a way to address those situations in a manner that makes sense is it's kind of ... That's the goal.
Gus Kallergis:
Maybe, Karl, it's worthwhile telling, just talking at least right now, as to picking and choosing who you're going to pay. I mean, that's, again, one of those things when you're sitting here and you're looking at all the different obligations that you have, how do you decide who to pay? I mean, obviously, the law has different priorities, and you have to work with your secured lender because oftentimes, they have a lien on all your assets, right? Just because everybody is a ... Most of your vendors, we'll say, are unsecured creditors doesn't mean that they're all equal, equally important to you. Even though they're equal under the law and they should be paid with the same priority, when you're trying to survive and buy yourself time to see how all of this is going to shake out, that's not the ... You need to prioritize those vendors that are most important to you, those vendors that you can't replace.
Gus Kallergis:
I think in this time, having talked to some folks in the business, there's a tendency to want to pay everybody a little bit. That may not be the right call in this particular situation where the people that are very important and supply product to you need to survive, and they need your payment. So, kind of prioritizing that, figuring out which customers are the most profitable to you and need you, those, I think, are the ways to address those particular issues. Then, similarly, I would say, it was raised up earlier by one of the panelists as well, is you should also think about whether or not paying certain vendors avoids personal liability. So, there are certain claims that if your company does not pay, it potentially leads to personal liability for officers and directors.
Gus Kallergis:
An example would be trust fund taxes, sales and use taxes, employee withholdings. All of those things, if you fail to pay, they generally direct your liability, and so again, my general counsel, at least when I'm talking to a company that's in distress in dealing with some of these greater issues, you got to make sure you pay those things. You want to make sure you don't bring your employees in if you're not going to be able to pay them, and so you really have to pick and choose, at least for a time now, to preserve that cash so that you have options later.
Karl Beus:
Thanks, Gus. Yeah. Just to go back and touch real briefly on impracticability and impossibility, those are legal doctrines. We're not going to spend a lot of time on them, but they're basically legal documents that apply in case, that could potentially apply if you didn't have a force majeure provision in your contract, and provide potentially similar rights, but again, like force majeure, they're very limited. Impossibility, in particular, is ... and that's the one that is most prevalent in most jurisdictions. Impracticability is a loose [inaudible 00:32:14] standard, but it really doesn't exist in Ohio at all. The document of impossibility would say that if the performance of the contract has become completely impossible, for example, because the government has shut down your facility, then you can be excused during the period of impossibility, but it can't be used, like a force majeure, it can be used just do to deal with reduced demand. Like force majeure, it almost never is used to avoid the payment, avoid the obligation to pay money.
Karl Beus:
Let's jump real quickly, and just talk about, because we've hit around this a few times, about dealing with our counterparty's distress, which is something that is, again, kind of unique about this COVID-19 time. We're all dealing with our own distress, and then we have to deal with most of our counterparties, our suppliers, our customers. Many or most of them in many businesses are all in distress as well. I guess it's a little bit of a mirror image of the discussion we just had, so I don't want to belabor the points, but I guess, Gus, what are you seeing that's different in commercial contracting in terms of dealing with a counterparty stress as opposed to dealing with your own?
Gus Kallergis:
Well, again, this is one of those blended business decisions and legal issues that you have to address. So, again, depending on what side of the business it is, again, I think one of the things that's different is when everybody is experiencing this distress, you have to understand the power of relationship, and you may not be as quick to exercise your rights and remedies. So, for example, I have a client who is a supplier of food products, and they received a letter that was sent out by one of their customers to all their vendors that unilaterally sought to extend terms to 75 days. Now, our particular client, their days were net 15, and they turned around and said they were in a position of power, they knew that this product was needed, and they didn't want to set a precedent for other customers of theirs, and so their response was, "You can't unilaterally change these payment terms notwithstanding this pandemic and that we treated this as an anticipatory breach and demanded immediate payments," and basically said, "We're not going to ship any further product until we have adequate assurance that you're going to be able to pay us on a go-forward basis." It resulted in that customer turning around and paying us right away.
Gus Kallergis:
Now, on the other side, if you have a vendor that's supplying product to you and you're doing a little bit better than they are or that you have more availability or the ability to weather the storm, this is one of those situations where you may turn around. This was common back when the auto industry was in distress and probably will come back around again where you had customer financing arrangements or different ways that their customer would support its vendors either by quick paying their own invoices to give much-needed cash to their vendors or potentially financing them. Sometimes, I've represented clients, again, where they're trying to keep their vendor afloat where they buy raw material directly for the benefit of that vendor and then offset that against what they need to owe just to, again, to try to keep people alive during this period.
Gus Kallergis:
So, I mean, that's kind of what I'm generally seeing. It might make sense really quickly to put in a quick word about preferences here as to how quickly do you want to demand payment from your customers and preferences. I think it's something that people tend to be overly concerned with because obviously, any payment that you receive on an antecedent debt within 90 days of a company filing bankruptcy is potentially recoverable as a preference, and so there's always a risk when you're trying to collect on an open debt that potentially accelerates payment or deviates from some of your other terms that there's a preference risk. The best way to avoid that is obviously getting paid in advance or getting paid contemporaneously.
Gus Kallergis:
Ultimately, my general advice is not to worry about those things. It's to get ... Well, if you can't get that, get as much money as you can as fast as you can because you just don't know when that company will ever file and if there will ever be a preference period to actually worry about. So, I think all of those things, kind of understanding the different pressures and positions for everyone kind of dictate how you respond to your counterparty's distress.
Karl Beus:
Thanks, Gus. Mara, in the commercial lease context, if you're a landlord, for example, dealing with tenant stress, what are you thinking about right now?
Mara Cushwa:
Well, there's the communication piece, which is key in that ... I'm repeating myself probably but to the extent that you are having a dialogue and you're willing to give concessions to your tenants, document them, document the purposes for the concession, and preserve your rights. So, look to your lease agreement. If their non-performance excuses your performance, you're going to want to make note of that. You're going to want to reserve your economic penalties that you can enforce against a tenant should they not come back online and not agree to an alternative arrangement.
Mara Cushwa:
Those remedies include penalties, interest, clawing back incentives granted at the outset of the term, forfeiture of the security deposit, and then there's also the property remedies. You always have the right to pursue eviction, and you might want to reserve that right. You have the right to terminate the lease, and you have the right to forcible entry and detainer in certain circumstances.
Karl Beus:
Thanks, Mara. So, I guess really, I mean to summarize really, it's kind of similar things to dealing with your own stress, seeking bilateral or multilateral solutions where they make sense, doing it all in the service of a broader strategy really, and understanding that nearly everybody you're dealing with on all sides of all issues really has potential for financial distress going on. With that, I'm going to move on. By the way, I don't think I said ... I can't remember if I said this in the beginning or not. There's a tab on your screen for questions. Feel free to type them in, and we'll try and answer those as we go. Otherwise, we'll try and reserve a little bit of time at the end as well. You might have to hover to see it.
Karl Beus:
We're going to move to another topic now, dealing with liquidity. We will now move the slide to do that. I guess, Ann, you're the financing expert here. Why don't you talk to us a little bit about liquidity in the market and what people are doing to make sure they've got access to cash right now?
Ann Seger:
Sure, so I think first, we have to mention, obviously, there's a broad range of stimulus programs available right now. I would assume everyone on this call has heard about the Paycheck Protection loans. There's also emergency SBA loans. There's Main Street Lending Program that's still being rolled out, state specific loans. I think we've touched on some of our companies that have international presences. Each country is doing their own stimulus, so something to definitely look into if you're facing liquidity issues, that's available to you.
Ann Seger:
The second piece though is, of course, if you have a revolving credit facility, looking at what liquidity do you have under your revolver. So, two things there, I mean, thinking about cash versus your borrowing availability, so if you have cash, great. You're likely perhaps in the minority right now, but as we continue to stretch into the sheltered place and everything else across the country, but the other thing to look at is, what are you able to borrow under your facility? So, in the sense of looking at, do you have enough room under your revolver, looking at what loans are outstanding, looking at what letters are printed or outstanding to meet your liquidity needs. If the answer to that is no, we would, of course, say talk with your lenders. Again, lenders are working with people and monitoring liquidity very closely.
Ann Seger:
I think that brings us into another point is committed versus uncommitted. I know Karl you and I have spoken a little bit about this, and I think being careful that your revolving line is a fully committed line, so that if you meet the conditions under your revolver, that you can actually draw on that versus an uncommitted line, which gives the lender discretion, in which case, again, you need to be speaking with your lender very closely there, but kind of making sure that your document works the way that you think it does and that that line of credit is actually there for you as opposed to being a discretionary consideration. I think, I guess I feel like I jumped in on ... Normally, Karl, you would talk about that but-
Karl Beus:
No problem. Yeah.
Ann Seger:
I know we're running out of time, so we're trying to be a little quick here. So, the next thing you want to think about is whether or not you actually can borrow under your revolver, so not just whether or not you have the availability but can you bring down your reps and warranties? So, anytime you're making, seeking and borrowing under your facility, you need to bring down your reps and your warranties, and then also, there needs to be no default or events of default in 90% of it, so some facilities, I think, it's just event of default, but typically speaking, you have both defaults and no event of default. So, making sure kind of all of the things we talked about leading up to this, are there other things that are going on in your liquidity situation? Customers are paying you, or you're not paying customers that may be implicating your ability to bring down those reps.
Ann Seger:
I think there's been a lot of, similar to force majeure, we've had a lot of noise around material adverse effect, which in a non-global pandemic situation is usually reserved for the most extreme situations. Well, now, we're in a most extreme situation, and admittedly, while there has been a lot of law firms publishing things about this, we're not really seeing lenders block revolver draws or take other actions on the basis of what's happening due to COVID-19 being a material adverse effect. We've seen some new agreements that are carving COVID out of your material adverse effect definition, but typically speaking, it's not been a consideration that, other than lawyers wanting to talk about it, I guess. So, I think-
Karl Beus:
Definitely true. There's so many conversations about material adverse effect and with good reason because theoretically, well, and in reality, I mean, lenders have, in certain situations in the past, blocked borrowers from borrowing if they believe there is a material adverse effect on the business, right? So, it's definitely something you want to consider. I can't tell you how many conversations I've had in the past month and a half where I've sat with a treasurer or a CFO and gone line by line through that material adverse effect definition in a way that they've never done before to help them understand what they can say and what they can't say. Sorry. I interrupted you.
Ann Seger:
No, no. I mean, it's definitely an important consideration, but I think we're, so far, I think generally speaking, we're not seeing lenders block borrowings on that basis.
Karl Beus:
I think that's right. One more point, Ann. Sorry.
Ann Seger:
Yeah.
Karl Beus:
That is similar to what Mara talked about earlier in the real estate context, the lenders have all been encouraged by the regulators to work with borrowers who were not in distressed situations heading into the COVID-19 times. So, and as Anna said a couple of times, our experience is they are definitely doing that.
Ann Seger:
There was a lot of noise when everything initially came when the lockdown started in March. There was a lot of noise primarily from some larger PE funds about making preemptive draws on your revolvers. I think that was something that lenders faced left and right. We got a lot of questions about it, and I think that, again, we would encourage you to talk with your lender, and determine if you really need to be making a draw for something more than your immediate cash needs and also whether or not it makes sense, right, just from the standpoint of under your facility and keeping in mind availability of stimulus and different things like that. So, I think it's something to consider, but we, again, would encourage you to talk with your lenders there.
Ann Seger:
Then, I think, Karl, I wanted to briefly talk about some of the covenant issues that are being thought of or considered as it relates to COVID. I mean, I think generally speaking right now, I know as Gus mentioned, there were obviously companies that were struggling before COVID-19, so those companies and those industries and perhaps some of the more harder hit industries may have felt these effects already in Q1. I think generally speaking though, the lenders and borrowers are bracing for impact in Q2, so I think that that's really, right now, is the time people are really feeling the financial impacts. Now is the time to be considering whether or not you're going to breach any of your financial covenants and, again, talking with your lenders, talking with your legal counsel, and trying to figure that out. I think we've already heard from a lot of our own clients and our lender and borrower clients about waivers and working through and amendments to work through those covenant issues. Again, I think typically, we're seeing that for the most part, everyone's trying to neutralize the impact of COVID.
Karl Beus:
There's some there are some very interesting amendments, some very interesting and very differing approaches in the market in terms of how you deal with that because the concern, of course, is that with revenues drying up and with no end in sight really, not yet anyway, nobody knows exactly how long it's going to last, and how quickly things are going to come back, it's very difficult to project. So, when you go to your lenders, Mara made a comment earlier that when you go to your landlord, you want to have a firm idea of what you're looking for. It's actually very difficult to project what your business is going to look like in three, six, nine months really.
Karl Beus:
So, one of the astonishing things really, in a sense but it makes perfect sense when you think about it, that we're seeing is amendments to credit facilities that effectively ignore the earnings impact of COVID in 2020. So, they'll basically say, "For the entire 2020, we're going to take, for each of the quarter, each of those four quarters, starting actually with second quarter of 2020, we're going to put a plug number of EBITDA in there that's based on historical EBITDA because we know that any EBITDA that we put in there, any EBITDA that actually happens is not going to be meaningful in the context of how we've negotiated this entire deal.
Karl Beus:
Now, by the way, that's not free, right? To get that, you have to be basically in an industry that's really hard hit, for example, the hotel industry, and your EBITDA and either fixed-charge or leverage covenant government will be replaced with a liquidity covenant because cash is all that people are really focused on right now, and you'll give up other rights as well. You'll give up the right to make distributions and dividends or severely constrain those rights. You'll give up the ability to do acquisitions without lender consent. So, that's one type of amendment we're seeing. We're seeing amendments really across the board from that going to more lenient amendments where borrowers are just seeking to maybe increase their maximum permitted leverage ratio for the next few quarters. So, it's fascinating to see the different things that are happening. There's a lot of discussion, and they will continue. I think that's only going to accelerate as we head into the period, as Ann said, where the stress gets more and more acute and visible. Let's see. Ann, you want to talk a little bit about EBITSA generally?
Ann Seger:
Sure. So, I mean, as Karl mentioned, I think right now, lenders are really more focused on liquidity is what we're hearing and seeing but EBITDA, the whole point of it is to try to capture, take out the noise and figure out what is actually the earnings of the company. There's been a very popular meme floating around the finance community that is a mug that says EBITDAC, which is earnings before interest, taxes, depreciation, amortization, and COVID, so obviously, it's sort of funny but not, right? I mean, COVID has impacted earnings, and again, as Karl was mentioning, how are lenders handling this?
Ann Seger:
So, I mean, I think there's a couple ways, as Karl mentioned, deeming it and then also just, again, trying to neutralize it. I think that it really is, the lenders are more focused now on liquidity because EBITDA, as it is, is somewhat of a fiction to some extent that you're trying to get really to the root and have various add-backs, but I think that everyone's recognizing that borrowers are trying to somehow capture the impact of COVID and a lot of times, looking to add back that lost revenue. Again, I think that there's a couple ways to handle that, but again, companies are just ... Everyone has sort of the common goal of trying to neutralize this and really focus on the main, which is liquidity.
Karl Beus:
I think that's right. You do have some very interesting discussions about the extent to which COVID-related losses and charges might fit within the extraordinary items, add-back, a typical EBITDA definition, for example. It'll be interesting to see ... By the way, we've seen some amendments to credit facilities that specifically block the ability to add anything back as extraordinary items there. We've seen others that don't do that, so a lot of interesting conversations and discussions around that, things that you should be discussing with your advisers as well, but I concur with Ann that, generally, people are trying to work through this and to put together productive amendments that allow the company to move forward and try and work through this.
Karl Beus:
Gus, in the remaining time, we've got six minutes left here, it appears. We probably want to ... I don't know if we have questions that are rolling in, but we might want to leave a little bit of time for a question and answer if there are any, but Gus, do you want to wrap up with some thoughts on operating in the vicinity of insolvency?
Gus Kallergis:
Yeah, sure. Thanks, Karl. So, one of the things that we've kind of talked, and I've tried to kind of pepper some of the insolvency stuff throughout the presentation because there are hints and bits and pieces that become relevant all along the way when you're actually ... You're not just dealing with an entity that has this isolated issue that they're trying to address, but you've got a larger issue. Actually, at one point actually, I want to make, not necessarily from the company side, its own distress, but when you're dealing with someone insolvent is I think that it's also important to be aware especially if you're a seller of goods and you discover that your buyer is insolvent or files for bankruptcy. There are specific remedies that you have that puts you in a better position.
Gus Kallergis:
One of the things that we talked about when we were talking about how do you pick and choose what you do and how do you deal with your counterparties, another point that's worth keeping in mind is, if something about to occur where you're going to be worse off, then had you acted? So, the one example that we're litigating in a retail case right now where we represent a foreign vendor is the vendor discovers the company's insolvent or its bankruptcy is imminent, should they ... One of the rights the UCC gives you is the right ... and it's not only that, the CISG, the international law on sale of goods, allows you to stop goods in transit. The right to stop goods in transit is enforceable both before bankruptcy, even after a bankruptcy, and it's not considered a violation of the automatic stay, so it's a very powerful right to make sure that you're going to get paid for those goods and that you actually have an administrative expense with respect to them.
Gus Kallergis:
With respect to a company, again, we're talking about these isolated incidents now, it's possible that at some point, they begin to aggregate, and you actually are insolvent. Insolvency can occur via balance sheet where your debts and liabilities exceed the value of your assets or you have the general inability to pay your debts as they become due. In any of those cases where you're insolvent, it's worthwhile stepping back and kind of assessing the situation and being proactive about how you're going to address that and how you move forward. Part of the reason is not that officers and directors get sued every time someone gets insolvent, but there are things that you can do to potentially minimize the risk of getting sued or also potentially puts you in a better position to defend that.
Gus Kallergis:
The reason insolvency is relevant for officers and directors especially if you look at some of the bankruptcy courts decisions that have come out on this is that it's not that your fiduciary duties change. You continue to have a duty of care and a duty of loyalty, but one of the things that the courts have focused on and looked at is, well, when the boards are making decisions, their officers are making decisions about the transactions they're about to enter into, are they more likely to bet the ranch and try to generate some return for equity holders versus taking steps to preserve and maximize value? So, it's like, do you take everything you have and go to a casino and bet on black because that's the only way that you can return something to your equity holders, or do you take the safer approach and you manage your expenses, and really potentially generate only a recovery for your creditors?
Gus Kallergis:
So, one of the things that I always recommend when I'm talking to my corporate colleagues and others is like, look, if you're getting close to this, it's always worthwhile to have a fiduciary duty presentation. Bring in an adviser to review your fiduciary duties and the impact of insolvency on those. Again, part of the reason to do this is it provides cover to the board and the directors and officers in that it shows that they are diligent in understanding what their fiduciary duties are, it shows that they want to be educated and consider all things, and that they're making their decisions with a view towards those fiduciary duties.
Gus Kallergis:
As I indicated, the current trend of the law is that your fiduciary duties don't change. It's still the duty care due to loyalty, but the ... You continue to have fiduciary duties to the company and to the shareholders, but there was a time where there was some dispute as to whether or not maybe there was a shifting, and you actually owed duties to creditors. Most of the cases, well, now has turned around or has settled on the fact that you generally don't owe direct duties to creditors, so creditors can't sue you in their individual capacity for a breach, but your duties always remain to that corporation or to the entity. The basic counsel is that you should act in a manner that preserves and maximizes value of the company.
Gus Kallergis:
So, it's good when you're in the vicinity of insolvency or insolvent to recognize and to assume that the transactions that you entered into, you may lose the benefit of the business judgment rule, and you may have to prove the entire fairness of the transaction that both the process was fair and the price was fair. All along the way, I guess the one thing that I would say as you enter that, I think one of the things that's most critical is to assemble a team, a structuring team of business folks and professional advisers that are going to help you figure out how to address these issues on a corporate basis or on a collective basis. You have to decide whether or not your current management has the skills necessary to do it. Your lenders are going to question whether or not you have those skills, and so putting together a team that's credible that can kind of help you navigate and determine what your different options are, is critical.
Gus Kallergis:
So, one of the things that I'll kind of wrap up with is that we always say in the restructuring world that it's like your business could be like a melting ice cube, right? Value is deteriorating as that ice cube melts away, and so finding the right people that kind of keep that ice cube, as much of that ice cube in place for as long as possible is going to give you your best options. I would be proactive in bringing people in to at least start thinking about what your alternatives are. Hopefully, you never need them. Taking the steps that we've talked about to potentially buy time is enough, but if you need more, the sooner you begin to consider your different options, the more options you'll have. I think that's what's the most critical part of whenever you're going into this contingency planning, restructuring, bankruptcy potential scenario, is to kind of understand what your options are, preserve them as best as you can.
Karl Beus:
Thanks, Gus. I guess I'll close it all off just by echoing what you said that really, for all of the things that we've been talking about here today, I think getting out in front of it and having conversations early and trying to develop strategies now, and contacting counterparties and working with them early and in a careful but smart manner is probably the biggest thing that I'd take away from this panel really, is that really. There are things you can do now, decisions that you can make, and advice that you can get that can make a big difference on how you're able to weather the storm, not just from your lawyers but from your accountants and from other finance professionals, and from all the stakeholders in your business.
Karl Beus:
So, it's a very difficult time to operate a business, for sure. I'm hoping, I guess I'm hopeful that some of the things we've talked about here today will be helpful to some of you in making progress with that. Thank you for your time and attention. We don't have any Q and A that I see. We're happy to hang around here for a minute or two if people are typing some in. Maggie, are you there?
Maggie:
Yes.
Karl Beus:
We can open up our lines for questions too if people want it for five or 10 minutes. Maggie, how would they let you know if they wanted to ask a question?
Maggie:
They would raise their hand.
Karl Beus:
Ah, okay. All right. We'll give it 30 seconds here to see if any hands get raised or maybe 15 seconds. Okay. Seeing none, I think we're going to call it. Thank you so much.