Type: Law Bulletins
Date: 03/17/2020

Five Ways Distressed Businesses Should Respond to the COVID-19 Crisis

At the risk of stating the obvious, the financial consequences of entire sectors of the economy being in suspended animation for several weeks is bound to have intense financial repercussions, including potential covenant defaults under credit agreements. In addition to our separate observations on managing supply chain challenges, we offer the following suggestions and thoughts:

  1. Blocking and tackling. Particularly if so-called non-essential personnel are being furloughed or working remotely, the organization needs to focus on the blocking and tackling tasks associated with creating and collecting invoices. Cash is the lifeblood of every business.
  2. Think about cash flow. Given the sudden and dramatic decline in revenues for many businesses, it may be impossible to reduce costs fast enough to match up with those reduced revenues. Moreover, when the crisis abates, you need to have your team intact. At this point, everything is on the table, including stretching terms on accounts payable. We like the recent example of United Airlines which, having learned some lessons from its 2003 bankruptcy case, instituted a series of simultaneous business reforms, including capacity reduction, senior management salary cuts and emergency negotiations with the labor unions.
  3. Ensure that your own financing is stable. Given the recent actions of the Federal Reserve, liquidity in the marketplace should not be an issue. However, prudent management teams should consider options for increased availability under their existing lines of credit and perhaps negotiate short term suspensions of principal and interest payments to assist with cash flow.
  4. Is this crisis an opportunity? Where there is disruption, there is opportunity. Be alert to developments in the marketplace and look for opportunities to secure new or additional business where competitors have failed or new markets have been opened.
  5. Bankruptcy does not create liquidity. In a worst-case scenario, companies in distress might consider filing for bankruptcy. However, while such a filing prevents landlords and other creditors from closing your business, you must have the ability to generate positive cash-flow, either from operations or with the help of a lender/investor.

If you have questions or concerns related to these or any other issues impacting your business, please contact Michael O’Neil or another member of Taft’s Bankruptcy and Restructuring practice group.

Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.

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