As governments impose restrictions on travel and more and more people are self-isolating and taking steps towards social distancing, the entire travel industry, the live entertainment industry and businesses with bricks and mortar presences, like restaurants and retail stores, expect to experience an immediate drop in revenue.
Similarly, other businesses face challenges due to reduced employee capacity, reduced consumption and supply chain disruptions (with some estimating that 90% of businesses in China were impacted by the initial outbreak and that more than 50,000 companies around the world have at least one direct supplier in the region). At the same time, the recent oil price shock has created significant challenges for businesses involved in the oil & gas industry, including both producers and service companies.
In this rapidly changing business environment, many companies will face liquidity challenges as they struggle with these unprecedented conditions and difficulty forecasting future business performance – and lenders struggle to assess new commitments in the face of uncertain market conditions. Because of the speed with which the adverse circumstances have developed, businesses that may have otherwise been able to adapt may not have had an opportunity to do any meaningful contingency planning. Our bankruptcy & restructuring practitioners are experienced in helping clients to navigate such challenging circumstances.
In such circumstances, businesses are encouraged to:
- Carefully review their anticipated cash needs, prepare updated cash flow forecasts based on assumptions, and conduct some sensitivity analysis to ensure a clear understanding of the timing for and scope of potential cash requirements;
- Review existing financing arrangements, including a review of drawdown conditions such as representations and warranties and any “no material adverse effect” representation. Identify whether additional funding is available, the conditions to its availability and whether any events of default are anticipated;
- Depending on the situation, consider initiating proactive discussions with lenders to update them on anticipated needs and any accommodation needed in respect of existing credit arrangements (for example, if professional advisors are not able to carry out audit work in the usual course, companies may require an extension for delivery of financial statements). An accommodation agreement provides the terms and conditions under which a lender will accommodate the borrower and may include, if necessary, an agreement to forbear (or delay) from exercising its rights and remedies. Restructuring professionals can assist in these discussions;
- To the extent the company is or will be operating in the “zone of insolvency” (including if it has insufficient cash to pay all of its liabilities that are due or coming due), consult a restructuring practitioner to discuss:
- How to ensure that payments that are made to creditors are appropriate and do not fall off-side reviewable transaction legislation (which can reverse payments that prefer one creditor over other creditors when the company is insolvent or on the eve of insolvency and, in certain circumstances, potentially expose officers and directors to personal liability);
- Considerations for directors and officers of an insolvent entity, including risk management strategies and best practices to mitigate potential claims against directors and officers – as well as practical strategies to ensure they are staying informed and discharging their fiduciary duties;
- Considerations for dealings with suppliers, including proactively dealing with suppliers and ensuring that representations made to parties such as suppliers are not misleading with respect to the company’s circumstances;
- If necessary, whether an insolvency proceeding may be advisable, including to obtain access to additional funding, to provide protection from creditors, to retain key employees in impacted industries, and to provide a framework for directors and officers to receive guidance and a measure of protection for decisions made during this crisis. Discussions may also involve which proceeding may be best and how it may impact various stakeholders, including employees.
By Sean F. Collins, James D. Gage, Heather L. Meredith, Walker W. MacLeod, Jocelin Perreault and Alain N. Tardif
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