The impact of the novel coronavirus on the global economy and individual businesses has been severe in the short-term, as we enter uncharted waters with this black swan event. The long-term effects remain unknown, as the expected duration of this health emergency and attendant business interruption constantly evolves. However, Pennsylvania and other states are reported to be considering shutdowns of "nonessential" businesses. Calfee attorneys are today fielding calls from concerned clients whose businesses have been categorized as nonessential, asking important questions about their options.
Calfee’s
Restructuring and Insolvency team has extensive experience working with companies dealing with financial distress and the attendant challenges. In these uncertain and unprecedented times, it is important to keep in mind certain business lessons that have universal application in attempting to optimize a company’s ability to recover and succeed.
Taken directly from the NCS HealthCare Inc. Restructuring playbook (a seminal case and the only restructuring to remain the subject of study in law schools today), below please find a listing of initial best practices to consider in the event your company shows signs of financial distress:
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Identify and Assemble Your Restructuring Response Team. It is imperative to build your key Restructuring Response Team and quickly ensure all members are on the same page with shared goals, priorities and action steps. Develop an effective and efficient communication plan and implement it immediately. Especially important during this global economic crisis where new laws and orders are being announced daily, it's critical to remain flexible and willing to pivot to Plan B when indicated.
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Experience and Credibility Matter. Business insolvency, creditors' and debtors' rights, business restructuring and bankruptcy are highly sophisticated, complex and nuanced areas of law. It is important for executive teams and their board members to trust the experience and expertise of the professionals they engage to help them through this type of legal and business challenge. It is advised that qualifications for the chosen lead outside counsel and lead outside financial adviser include at least 20 years of continual, successful restructuring experience. Trusted advisers should be focused on collaboration and effective communication with the client team, and they should demonstrate a degree of care and concern that parallels the client team's when it comes to developing
a successful strategy that will return the organization to financial stability.
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Conserve and Preserve Access to Cash. Cash is essential to enterprise autonomy, which is essential to achieving a successful restructuring. During a restructuring, the team must fully understand the organization's immediate and ongoing cash needs, the financial impact and projections, and understand their financial covenant obligations.
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Know Who and What You Must Pay to Avoid a Liquidity Crisis. As described in the NCS HealthCare case study (see "Unencumbered Cash Is Oxygen – Protect It"), strategies can be employed to protect an organization's available cash, including developing creative agreements to delay payments to vendors and other creditors. It is critical to prioritize cash being paid out of the organization to ensure that the organization can survive.
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Time May Be Your Friend. Buy More Time. In times of financial distress, it is important to engage in the proper strategies to buy the organization time to work through the multiple layers of issues and options. Reflexive decisions made in the short-term may lead to a limitation of viable options to successfully restructure a business down the road. With the proper guidance from experienced professionals, the client team will take the time to identify their best course of action and avoid being rushed into taking immediate action that may not be in their overall best interest.
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Fix the Business Operations. As clearly is the case with today's COVID-19 business interruptions, unforeseen economic upheaval can lead to financial distress. However, if there were underlying business practices that contributed or accelerated the impacts of an unexpected causal event, it is imperative to use this opportunity to identify and fix any faulty operational practices.
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The First Available Out May Not Be the Right Out. Generally, bankruptcy should not be an acceptable first option. Distressed industries typically recover in two years' time, and there may be value appreciation on the upswing for companies that take the necessary time to work through all options and decisions with trusted advisers. It's critical to carefully evaluate all available exit options and understand value-maximization opportunities.
Calfee invites you to visit our COVID-19 Resource Center containing First Alerts to help guide you through the challenges faced by individuals and organizations as a result of the novel coronavirus outbreak. We are committed to helping you meet the diverse and complex challenges and navigate the disruptions caused by this pandemic. Please check the COVID-19 Resource Center regularly for the latest updates, or subscribe to receive the most up-to-date Alerts sent directly to your email inbox.
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