By Mark Williams, Chief Revenue Officer, Americas, Datasite
As we continue dealing with the aftermath of the global pandemic on the U.S. economy, even companies with strong balance sheets just a few months ago suddenly find themselves exploring restructuring or a need to review strategic alternatives for their businesses. In unprecedented times like these, is Chapter 11 bankruptcy the only way out? And if not, what other options do companies have?
To help find answers, Datasite and Debtwire assembled a panel of experts for the webinar, “U.S. Restructuring Outlook: The New Bankruptcy Paradigm.” In addition to reaffirming Chapter 11 as a preferred path for businesses experiencing financial distress, they shared other relevant market insights for management teams and dealmakers to keep in mind. Here are some of the most noteworthy takeaways.
This is not like the Great Recession
Our panelists – each with decades of experience in the financial markets – agreed it’s never been more difficult for longer-term business planning. However, they also agree the current market downturn is materially different from the economic crisis of the late-2000s. Chief amongst the reasons for this assertion is stronger, better-capitalized banks. In addition, there isn’t a singular threat akin to the housing bubble that triggered the Great Recession. Instead, today we face a unique situation largely considered a temporary disruption. This has led to most lenders and sponsors being more accommodating in giving debtors breathing room to respond and recalibrate in the face of the pandemic. Whether this visible leeway is driven by altruism, opportunism, or some combination of both is up for debate.
Another big departure from past downturns is an acute disparity in perceptions and expectations based on where you are in the US. In previous downward cycles, people had generally uniform views around what recovery would look like across the United States. Today, distinct differences of opinion depending on where people are physically sitting exist. Management teams in Texas, for example, project very different timelines than lenders in harder-hit areas like the Northeast.
Expect more Chapter 11 filings
In the early days of the pandemic, businesses focused on immediate tactics they could control – drawing on revolving credit, instituting furloughs and layoffs, deferring capital investments, and discretionary spending. Now comes the tricky part: figuring out what comes next. Our panelists and webinar attendees agree – Chapter 11 restructuring will become the dominant strategy businesses activate in an effort to rehabilitate financial performance.
This shouldn’t be surprising. Chapter 11 provides a unique opportunity for a business to stay everything, pause debt service obligations, and get lenders to come to the table. It is a particularly attractive option for companies that have may have drawn on revolvers but are now face issues with litigation, commercial leases, and high debt service.
However, Chapter 11 costs and DIP financing are expensive and involve a limited operating period. This can make things challenging as parties argue about who bears the risk of administrative claims. In retail, for example, bankruptcy has historically been a great option to get out of leases. But does it make sense to enter Chapter 11 now, where rent obligations can become an administrative priority expense, versus just not paying rent?
Expect more transactions
With dry powder estimates topping $250 billion among the largest private equity firms alone, our panelists expect it’s only a matter of time before we see an uptick in transactions with dealmakers capitalizing on the most attractive opportunities. Webinar attendees agreed with this assertion – more than 70% maintain a positive outlook for distressed M&A activity in the months ahead.
Our panel discussion made clear businesses in the U.S. are likely to have multiple restructuring strategies available – Not just Chapter 11. Each company needs to closely evaluate the costs and benefits with their legal and financial advisors to conclude if Chapter 11 or a different pathway is the best way forward.