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Commentary: The Role of Chapter 11 Bankruptcy in Addressing the Consequences of COVID19

ABI Bankruptcy Brief

April 30, 2020

ABI Bankruptcy Brief

Commentary: The Role of Chapter 11 Bankruptcy in Addressing the Consequences of COVID19*

Many businesses may require bankruptcy proceedings to assist in recovery from the COVID-19-induced recession, according to a commentary by Prof. Jay Westbrook in the CreditSlips Blog. In his view, the best legal approach to any chapter 11 reforms necessitated by the emerging economic crisis lies in building up from the Small Business Reorganization Act (SBRA) to cover more small and medium enterprises (SMEs), rather than trying to adjust the general provisions of chapter 11, the home of larger bankruptcies like General Motors and American Airlines. The database at the Business Bankruptcy Project shows that in 2018, more than half of the businesses that filed under chapter 11 in the Southern District of New York would have fallen under the temporary SBRA cap of $7.5 million. Most immediately, the recently voted funds for small businesses must be available in bankruptcy reorganization cases, according to Prof. Westbrook, and we must remove any barrier to using them in that way. Bankruptcy cannot help unless it can be used in connection with rescue funding, according to the commentary.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Weekly Jobless Claims Hit 3.84 Million, Topping 30 Million over the Last 6 Weeks

The Labor Department reported today that first-time filings for unemployment insurance hit 3.84 million last week as the wave of economic pain continues, reported. Jobless claims for the week ended April 25 came in at the lowest level since March 21, but bring the rolling six-week total to 30.3 million as part of the worst employment crisis in U.S. history. Claims hit a record 6.87 million for the week of March 28 and have declined each week since then. Last week’s initially reported figure was revised up by 15,000 to 4.4 million, meaning that the most recent total is a decrease of 603,000. Continuing claims rose to just shy of 18 million, a rise of 2.2 million from the previous week. The four-week moving average, which smooths volatility, jumped to 13.3 million, an increase of 3.7 million from the previous week’s average.


Federal Reserve to Offer ‘Main Street Loans’ for Businesses with Up to 15,000 Employees

The Federal Reserve is planning to launch its emergency lending program for small and medium-size businesses soon, and even more businesses will be able to qualify than originally planned, the Washington Post reported. The Fed said today that businesses with up to 15,000 employees and $5 billion in annual revenue can apply, a much higher threshold than the initially announced caps of 10,000 employees and $2.5 billion in revenue. Lobbyists and some lawmakers had urged the Fed to open the loans up to more companies, especially distressed oil and gas firms. Companies should soon be able to go to their banks to obtain one of these loans, but the program is not up and running yet. Fed Chair Jerome H. Powell said yesterday that he expected the “Main Street Lending Program” to be operational “fairly quickly.” “These are not grants. These are loans,” Powell emphasized yesterday. Most small businesses with less than 500 employees have been encouraged to seek a Small Business Administration loan, known as the Paycheck Protection Program, because that can be forgiven if the small business uses most of the money to rehire and pay employees. The Fed’s program is designed to target midsize companies and businesses that need money for more than just payroll expenses. The minimum loan size is $500,000, and companies will have up to four years to pay the money back. Most of the loans are capped at $25 million, but the Fed created an additional option to obtain a loan of up to $200 million. The interest rate on the loans will be about 3.4 percent, as it is set three percentage points above the LIBOR, a global benchmark interest rate. By contrast, the Small Business Administration’s PPP loans were set at a much lower interest rate of 1 percent.

Commentary: Is This a Liquidity Crisis or a Solvency Crisis? It Matters to the Fed*

Whether the economy is facing a liquidity crisis or a solvency crisis is a distinction that will determine how important the Federal Reserve is to returning the economy to health, according to a Wall Street Journal commentary. In a liquidity crisis, otherwise-healthy firms collapse because they can’t access credit. The Fed can resolve such a crisis because it can print and lend unlimited amounts of money. In a solvency crisis, companies can’t survive no matter how much they can borrow; they need more revenue. The Fed can’t solve that. Fed Chairman Jerome Powell underlined the distinction yesterday. The central bank had directed aid to sectors “where we have never been before and … quite aggressively,” he said at a news conference after the central bank’s policy meeting. “Nonetheless, these are lending powers. We can’t lend to insolvent companies. We can’t make grants.” By preventing illiquid companies from going bankrupt, the market seems to believe that the Fed has set the stage for a brisk economic recovery once the coronavirus pandemic eases. Investors may have conferred more power on the Fed than the Fed believes it has. Mr. Powell urged Congress to appropriate more money to aid potentially insolvent firms and the unemployed. “This is the time to use the great fiscal power of the United States to do what we can to support the economy,” he said. A much bigger challenge looms: the many companies that were profitable before the pandemic and should be again when the pandemic has passed, but that may not survive that long. Providing them with cash should pay economic dividends in terms of protecting jobs and incomes, but such a move is complicated by the question of whether the firms are illiquid or insolvent. (Subscription required.)

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Analysis: The Devil's in the Details for Junk Debt Investors Facing Coronavirus Defaults

Before the coronavirus, investors hungry for returns piled into risky corporate loans and bonds with precious little protection for creditors. Now they’re frantically scouring the terms to see just what firms can get away with to survive the fallout, according to a Reuters analysis. At the same time, firms starved of cash and funds thinking about lending to them are also poring over the fine print to see what room they have to shift assets away from other creditors, pay dividends or borrow more while staving off default. With the coronavirus pandemic threatening to trigger a surge in corporate loan defaults, borrowers and investors in so-called covenant-lite loans and high-yield bonds with weak protections for creditors are taking stock fast. Over the past decade, the leveraged-loan market has trebled to about $1.4 trillion. Whereas only 15 percent of loans in 2010 were deemed covenant-lite, now more than 80 percent lack clauses that might trigger warnings about a company’s finances or stop it from stripping out assets, according to S&P Global Market Intelligence.

Commentary: Borrower Beware: CARES Loans Carry a Steep Cost*

Questions are already arising about whether the federal dollars flooding the U.S. economy during the COVID-19 crisis are reaching the intended recipients, and rightly so, when trillions in taxpayer dollars are at stake. But it should make businesses think twice before they take federal money, according to a Wall Street Journal commentary. Clearly, there should be a financial lifeline for America’s hundreds of thousands of small businesses and 30 million unemployed. When the government orders “nonessential” business to close, it’s only reasonable that it should compensate them. But borrower beware! Businesses with flexibility should seriously consider to what extent accepting the terms of federal loans or other support may be a Faustian bargain. The ultimate cost may dramatically outweigh the temporary gain. Through the congressional oversight commission established under the CARES Act, the new Special Inspector General for Pandemic Recovery, and numerous other freshly funded inspectors general, the groundwork has already been laid for aggressive investigation and review of which businesses received — and how they spent — federal emergency funds. Read more. (Subscription required.)

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

The abiLIVE panel discussion held on April 6, featuring former House Speaker John A. Boehner, discussed oversight of funds appropriated by the CARES Act and provided a warning to firms about being transparent and acting in good faith in accepting the funds. Access a replay here.

Coronavirus Oversight Panel Staffs Up

The committee of inspectors general investigating the coronavirus pandemic response — which lost its chair earlier this month — named its top staffer and launched a website to help the public track its investigations, reported. The Pandemic Response Accountability Committee, which was created by Congress in the CARES Act, selected former inspector general Robert Westbrooks to be executive director of the committee, which will examine the coronavirus outbreak response and the trillions being spent to prop up small businesses and help corporations. The PRAC, composed of 21 members from offices of inspectors general across the federal government, is intended to help coordinate their investigations into various elements of the outbreak response. But the committee has gotten off to a rocky start after naming then-acting Pentagon Inspector General Glenn Fine as chairman of the committee. A week later, Trump replaced Fine as head of the Defense Department inspector general office — which in turn made him ineligible to serve on the coronavirus panel, let alone lead it. In addition to the inspectors general committee, the CARES Act created a new special inspector general for pandemic recovery and a five-member Congressional Oversight Commission, and provided an influx of funding to nonpartisan congressional watchdog the Government Accountability Office. House Speaker Nancy Pelosi has also created her own new select subcommittee in the House to investigate the coronavirus response.

In related news, Speaker Nancy Pelosi (D-Calif.) yesterday filled out the Democratic roster on a special committee overseeing coronavirus relief spending, naming six new members to the newly created panel, including some of President Trump’s harshest congressional critics, The Hill reported. The panel, created by a party-line vote last week, will be led by Rep. Jim Clyburn (D-S.C.), the Democratic whip. In a letter to Democrats Wednesday, Pelosi named six additional members: Reps. Maxine Waters (Calif.), Carolyn Maloney (N.Y.), Nydia Velázquez (N.Y.), Bill Foster (Ill.), Jamie Raskin (Md.) and Andy Kim (N.J.). Democrats are billing the panel as a commonsense safeguard to ensure that the historic levels of emergency funding — money designed to prop up businesses, workers, families and medical providers most affected by the coronavirus fallout — aren’t frittered away by fraud and abuse. Republican leaders in Congress and the White House have said that the Clyburn committee is both redundant and politically motivated. They’re accusing Democrats of establishing the panel merely to embarrass Trump in the months leading up to November’s elections.

New ABI Website Supplies Bankruptcy Professionals with Key Resources to Help Navigate the Financial Crisis Resulting from the COVID-19 Pandemic

ABI this week launched its new COVID-19 Resources website for bankruptcy professionals and the public to access essential information and analysis regarding the financial distress being inflicted by the COVID-19 pandemic. The site features exclusive ABI content on the crisis, recommended member analysis, industry sector news, charts and more. Click here to access the site, and be sure to bookmark the page so you can easily check back for regular updates!

Upcoming abiLIVE Webinars to Examine Litigation Finance, Nuts and Bolts of Subchapter V for Small Businesses and Chapter 12 Update

ABI will host a number of abiLIVE webinars over the next two weeks looking at key issues for practitioners amid the economic downturn due to the COVID-19 pandemic. Expert panels include:

• The "Litigation Finance: Lessons from the Last Financial Crisis for the COVID-19 Downturn" webinar on May 6 will feature Eric Fisher of Binder & Schwartz (New York), Marc Kirschner of Goldin Associates, LLC (New York), Cathy Reece of Fennemore Craig PC (Phoenix, Ariz.) and Emily Slater of Burford Capital (New York). Click here to register for free.

• Sponsored by ABI's Consumer Bankruptcy Committee, the "Understanding the Nuts and Bolts of ‘New’ Subchapter V Small Business Chapter 11" webinar on May 7 will feature Committee co-chair Jon Lieberman of Sottile & Barile (Loveland, Ohio) moderating a panel including James B. Bailey of Bradley Arant Boult Cummings LLP (Birmingham, Ala.), Bankruptcy Judge Paul W. Bonapfel (N.D. Ga.; Atlanta) and Judith Greenstone Miller of Jaffe Raitt Heuer & Weiss, P.C. (Southfield, MI). Click here to register for free.

• The "Update Your Chapter 12 Skills" webinar on May 20 will be hosted by ABI's Legislation Committee and feature Bankruptcy Judge Robert L. Jones (N.D. Tex.; Lubbock), Joseph A. Peiffer of AG & Business Legal Strategies (Cedar Rapids, Iowa) and Ronda J. Winnecour, Office of the Chapter 13 Trustee (Pittsburgh). Click here to register for free.

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New on ABI’s Bankruptcy Blog Exchange: SBA and U.S. Treasury Announce Full “Review” of Businesses Receiving PPP Loans Greater than $2 Million

Treasury Secretary Steven T. Mnuchin and U.S. Small Business Administration administrator Jovita Carranza issued a joint statement on April 28 stating that a review will be conducted for businesses seeking loan forgiveness for loans in excess of $2 million under the Paycheck Protection Program (PPP), as enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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