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You’ve Cut Costs, Laid Off, or Furloughed Employees. Now What?

April 6, 2020


As COVID-19 wreaks havoc on people around the world, it is also severely disrupting numerous companies’ health, balance sheets, and ability to survive. The impact is already manifesting itself as businesses temporarily suspend operations and furlough their employees as revenue is lost and expenses mount. It is inevitable that many of these companies, especially those that were already distressed prior to the COVID-19 crisis, will need to restructure their debts.

Restructuring Leases, Other Contracts, and Loans

An otherwise profitable company may be weighed down by just a few unfavorable ongoing contracts or over-market leases which it may reject in a bankruptcy proceeding. Also, if the non-debtor counterparty to the contract realizes that it has limited or no upside to the rejection of its contract by a debtor in a bankruptcy proceeding, it may be willing to modify its terms in lieu of the debtor filing bankruptcy (namely, an out-of-court restructuring). At times, landlords or contract counterparties may not be willing to negotiate regardless of the threat of a bankruptcy filing. In the present climate, however, where landlords and other contract counterparties will be deluged with requests for lease and contract concessions, it is an excellent opportunity to seek more favorable terms in the out-of-court context.

It’s likely that most every shuttered retailer in the United States is at least considering requesting rent relief or planning to disclaim responsibility for paying rent during the period when they are not allowed to operate. While many of these tenants may normally be profitable and victims of circumstance, others may simply be troubled companies destined to fail without corrective action. Regardless, they need to evaluate their options so they can determine their best path to success, including whether they may negotiate and obtain concessions and more favorable terms without the need to file bankruptcy.

The very same opportunity discussed above to restructure leases and contracts applies to loans. Once again, lenders of all types will be overwhelmed with requests for forbearances and restructurings and cannot possibly handle the volume or the impact on their bottom lines if all entities were to file bankruptcy. It creates an excellent opportunity for entities that were already distressed, or became distressed because of the COVID-19 crisis, to work with the respective lender to restructure their debt out-of-court.

Liquidating Assets

If the financial distress is very severe, liquidation of some, or a significant portion, of their assets to generate cash may be necessary for the company to survive. Historically, troubled retailers would liquidate their most liquid assets, namely their inventory and owned furniture, fixtures, and equipment (“ff&e”), through liquidation sales at their retail store locations. However, in the age of COVID-19, with the vast majority of states under “shut down” orders, this historical outlet is not presently available. Furthermore, even if the stores were open, foot traffic could be minimal due to consumer fear of catching the virus, coupled with the existing, or feared, consumer financial issues. In the immediate future, retailers strapped for cash may need to consider alternatives.

Retailers should consider whether liquidation of their inventory through an ecommerce platform is a viable cash positive option. It may not be a host of reasons including: (i) location of the inventory being spread amongst their stores; (ii) costs of ramping up their ecommerce platform; (iii) the inefficiencies and lack of capacity of their ecommerce platforms that pre-existed COVID-19; and (iv) inability to compete with well-situated ecommerce merchants like Amazon.

Another option available for retailers to consider is a possible wholesale transaction with discount retailers willing to take the inventory off their hands for steep discounts. Again, the location of the inventory could present an impediment to such a transaction. Retailers in a position of having to liquidate their assets now, in the midst of the COVID-19 crisis, may have to get creative and aggressive and evaluate whether a liquidation via ecommerce or through a discounter retailer could generate the liquidity they need.

Protecting Financial Interests if Business Partners File

The current crisis is likely to create a domino effect where one company’s failure leads to problems for its partners. Companies should monitor the health of their vendors, customers, and trading partners so as to avoid a disruption and further damage. If a contract has been entered into, the non-distressed counter-party must assess whether they may diversify and/or exercise rights to assure that the vendor, customer, or trading partner will perform as promised. Companies that sell goods, as opposed to services, should also be careful to monitor their supply chain, as a disruption in supply could cause a disruption in production, and in turn, as disruption in sales. If any of the above monitoring leads an entity to believe that their vendor, customer, or trading partner is distressed, they should at a minimum research and locate alternatives should the need arise. Depending on the severity of the situation, and assuming a contract is in place, assurance of performance should be demanded pursuant to the contract and/or applicable law.

Montgomery McCracken attorneys are available to assist clients with numerous issues related to COVID-19. Visit the firm’s Coronavirus (COVID-19) Resource Center for more information and updates on this constantly evolving situation.