Articles Tagged with Trends

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As we learned during the downturn in 2008, the economic climate can change rapidly. When things are going well, many businesses forget the lessons of the past. No matter what industry your business is in, there may be occasions when you are asked to enter into a relatively long-term contract, i.e. longer than three years. Such agreements are sometimes favorable because of the stability and predictability they can provide. However, before entering into such an agreement, you should consider that the longer the contract, the greater the risk of a change in the contract counterparty’s financial situation. A safe credit risk in 2017 might find itself filing for bankruptcy by 2020.

If your response is: “I am not concerned about the other party filing bankruptcy. I had my attorney include a bankruptcy termination clause in our agreement,” then you may want to think again. The U.S. Bankruptcy Code has a lot to say about the rights of both the debtor and the non-debtor party once a bankruptcy is filed – often to the chagrin of the non-debtor party.

It is true that many business agreements contain clauses which provide that a party filing bankruptcy is deemed to have breached the agreement, and the other party may terminate the agreement (a “Right to Terminate” clause). Or the provision might say that if one party files bankruptcy, that party’s rights terminate automatically (an “Automatic Termination” clause).

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We asked some of our financial advisor colleagues to give us brief read outs on what they felt 2017 has in store for us now that we have gotten beyond the inauguration and into the first weeks of the Trump administration.  Their thoughts follow:

https://www.southerncaliforniabankruptcylawyersblog.com/files/2017/02/2012-03-31-10.05.15-214x300.jpgWe have been seeing a lot of highly leveraged deals that impact the performance of the business. These deals are leading to reduced spending on capital expenditure, marketing and even experienced management.  Once new ownership is in place, these strictures prevent the company from operating with the same efficiency as in the past, let alone growing.  Another scenario we have been encountering is companies getting beyond the management ability of the founder as the company increases revenues from $25M to $50M and then to $100M or more. In either case, increasing interest rates will cause dislocation, because it does not take much to push these companies into a zone where they are showing significant financial stress.

That being said, we are also seeing that lenders are still being lenient because it’s really hard to get a full recovery in a liquidation, and appraisal firms always seem to be the first to hedge on their ability liquidate inventory en masse.  Also, my sense is that lenders don’t really want to sell their loans to exit a credit as it hurts their reputation.  Still, we are finding that lenders keep getting surprised with over-advances for many reasons.  When we are called in to assist in such situations, we focus our efforts on trying to fix the operating issues of the businesses and make a reasoned re-allocation of limited resources.

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Inauguration is still about 2 months away, but it is not too early to begin thinking about what the Trump Administration will mean for commercial lawyers in general and bankruptcy lawyers in particular.

Bankruptcy Reform?

We are not hearing anything about a push for bankruptcy reform as part of the new administration’s agenda. Two potential exceptions are the fate of the proposed Financial Institution Bankruptcy Act of 2016, H.R. 2947, 114th Cong. (2016), which would add a new chapter to the Bankruptcy Code dealing with large financial institutions.  Another is the potential for the new administration to take a different position than the Obama administration on Czyzewski v Jevic Holding Corp., which is now pending before the United States Supreme Court.  To date, the Solicitor General has argued that the Third Circuit was wrong to affirm the Bankruptcy Court’s approval of the “structured settlement” which resolved that case.[i]  With so many other issues swirling about, it does not seem likely that bankruptcy reform per se is in the offing.  However, a number of other potential policies may impact bankruptcy practices.

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Filings are Down

Commercial bankruptcy filings were down by 28% in 2013 over the prior period in 2012, and overall bankruptcy filings dropped 15%, putting the country on the lowest level of petitions since 2007 according to figures released by the American Bankruptcy Institute.  The data, compiled by Epiq Systems, Inc. and released by the American Bankruptcy Institute shows there were 3,055 commercial filings in November 2013 down from 4,252 filings in November 2012.

So What’s Up?

With the continued improvement in the economy, this trend undoubtedly will continue.  So what does that bode for the world of restructuring professionals?  Well, obviously, with the reduced number of filings there is a reduced case load for restructuring professionals to sink their teeth into.  However, what is also evident is that with the passing years it seems that the nature of bankruptcy filings have also changed.

While this is somewhat anecdotal, it also appears to be backed up by the data.  Over the last several years, the nature and way that chapter 11 bankruptcy filings are being handled has changed.  Gone seem to be the days of traditional restructurings where a company filed a chapter 11, worked its way through the issues that caused it to file in the first place, and ultimately filed a plan of reorganization some 9 months to 2 years later, all the while being funded either by the company’s existing lender or by a new debtor-in-possession (“DIP”) lender.  More and more cases these days are being disposed of by way of a relatively quick section 363 sale.

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