As one of the nation’s premier boutique law firms focusing on corporate restructuring and bankruptcy matters, our team at Goldstein & McClintock LLLP has both unique insights and responsibilities as we watch the rapid progression of the coronavirus (COVID-19) and the social and economic disruptions it has caused.

Our role in the community – helping businesses remain operational through turbulent economic times, preserving jobs, and maximizing economic outcomes for stakeholders – has never been more important. While we are all working remotely to safeguard the health of our people – and in turn the health of our clients and the communities where we live and work – we remain as committed as ever to providing highly responsive and exemplary service to business clients experiencing financial distress.

The Scope of the Challenge

Although the U.S. economy was generally strong prior to the COVID-19 outbreak, many businesses were already facing economic challenges due to higher payroll costs, increasing competition from online retailers, and other factors. G&M had already seen an uptick in calls from troubled companies in early 2020.

The impact of COVID-19 on businesses, including due to shelter in place and quarantine orders, has of course been unprecedented, including:

• Businesses having to temporarily close or vastly scale back operations;
• Substantial productivity declines even for businesses able to transition to “remote” operations;
• Productivity declines due to disruption to domestic and international supply chains.

At a macro-level, major investment banks are now predicting U.S. gross domestic product (total economic output) to contract by between 20 and 30 percent in the second quarter of 2020, and the unemployment rate to reach double digits. At a micro-level, businesses around the country are facing acute cash flow issues: mortgages, rent, payroll, and debt obligations still need to be serviced notwithstanding the impact the virus is having on revenue. Even businesses with strong balance sheets should be prudently planning for worst-case scenarios and reducing non-essential expenses.

Options and Resources for Business Owners and Stakeholders

The good news is that business owners and stakeholders have financial and legal tools available that can help them “ride-out” the storm, including financing and streamlined restructuring options that have just come on-line as a result of the crisis.

Employing these options strategically, however, is critical. Acting reactively to short-term funding needs can sometimes be worse than doing nothing. For example, injecting personal funds (equity or loans) or borrowing money to cover immediate cash-flow issues can leave a company without the resources needed to effectuate a more comprehensive restructuring if the initial infusion turns out to be insufficient. We see this way too often. Additionally, if a broader restructuring is required – or perhaps strategically beneficial to address unrelated issues or for the long-term health of the business – the new money required to fund operations can often come in ahead of – i.e., senior to – some or all of the company’s pre-existing indebtedness.

In sum, the tools discussed below can be applied independently or together, and before taking any steps (such as borrowing money or taking on new equity) companies should develop a comprehensive strategy. We are happy to help you think through how to deploy these resources in the manner that will maximize their effectiveness and position your business to thrive when the COVID-19 pandemic finally recedes.

          A.     Financing Options

In situations where conventional financing is not an option – often the case for many distressed mid-sized and smaller companies – companies are left to look at alternative lenders (typically at higher rates), equity or insider loans, or government-subsidized loan and grant programs (the latter being especially relevant now in light of the COVID-19 situation).

With respect to government-subsidized loan and grant programs, there are a number of state and federal resources already in place, and a number of others just coming on-line, that mid-market and small businesses can take advantage of to help survive the current economic situation.  Most of these are loans, but some are grants (and some loans are partially forgivable, meaning that they effectively act as grants). Options include:

• State-specific relief programs. In Illinois, to give one example, there are grant programs for the hospitality industry, low rate small business loans, and low interest disaster loans being made available. Click here for a map of resources by state.

• City-specific relief programs. Using Illinois as an example again, the City of Chicago is making loans available for small businesses suffering due to the COVID-19 crisis (and other municipalities are enacting similar programs). Click here for a map of resources by state.

• Federal relief programs. On the Federal front, several programs have already been approved, including via the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) that was signed into law on March 27, 2020. The primary COVID-19 related loan programs are two Small Business Administration (“SBA”) 7(a) loan programs: (a) “Payroll Protection Program Loans” (loan sizes up to $10 million) and (b) “Economic Injury Disaster Loans” (loan sizes up to $2 million). Notably, some amounts borrowed under the foregoing programs may be forgivable. Click here for details on federal programs.

G&M is maintaining a COVID-19 Resource Page with links to emergency lending and grant programs the firm is aware of, and other helpful information. Please take advantage of the resource page, but note that it is not comprehensive, and every company should be checking state and local programs in their own jurisdictions.

          B.      Bankruptcy & Restructuring Options

Even if financing is an option to cover short-term liquidity needs, in distress situations it is almost always worth considering whether there are greater benefits that can be achieved through a more comprehensive restructuring (whether accomplished in or out of court).  Through a Chapter 11 bankruptcy filing for example, a company will have tools at its disposal to eliminate burdensome leases, sell or otherwise dispose of unprofitable divisions or locations, and reduce or eliminate certain debts to clean up its balance sheet.

Moreover, bankruptcy can provide short-term cash-flow relief. Once a Chapter 11 bankruptcy is filed, the debt that existed prior to the filing is put on hold until a plan of reorganization is approved.  The business is only required to pay its current obligations.  Bankruptcy can also provide a much better avenue to inject new liquidity in a truly distressed situation, with the new financing often coming in senior to some or all pre-existing debt. 

Chapter 11 bankruptcy is an extremely flexible tool and can allow companies to survive difficult economic situations and emerge financially stronger. Moreover, the threat of a potential filing – and being able to understand how a chapter 11 case will play out, can often allow companies to achieve similar results via consensual “out of court” restructurings.

Finally, it is worth noting that recent changes to the bankruptcy code may provide even more efficient alternatives for smaller businesses to remedy distressed financial situations. The Small Business Reorganization Act (“SBRA”) took effect on February 19, 2020 and created a new subchapter for small business with liquidated debts under $2,725,625, and this is now being increased to $7,500,000 under the CARES Act.  The SBRA makes it easier and faster for small businesses to reorganize and emerge from bankruptcy, including obviating the need for a disclosure statement, eliminating the absolute priority rule (making it easier for business owners to retain ownership without paying creditors in full), and speeding up the plan of reorganization process. 

For the above reasons, it almost always makes sense to consult counsel about strategic options when facing a distress situation. You can explore G&M’s restructuring practice here, including contacting any of G&M’s bankruptcy and restructuring professionals.

G&M understands the critical role its professionals play at this time, and its professionals are happy to provide their perspective and ideas – a process that can be invaluable to business survival and stakeholder outcomes.

***

Goldstein & McClintock LLLP (www.goldmclaw.com) and its attorneys have extensive experience representing distressed clients in workout transactions around the country (both in and out of bankruptcy).  G&M is uniquely positioned to offer affordable, yet extremely sophisticated, counsel to clients that are experiencing financial distress of any type and help guide them through these troubling economic times.

Authors and G&M Contacts:

Jeffrey C. Dan, Esq. | 312-219-6702 | jeffd@goldmclaw.com 

Matthew E. McClintock, Esq. | 312.219.6732 | mattm@goldmclaw.com