As much of the country has ground to a halt in the wake of the Covid-19 crisis in recent weeks, corporate restructuring attorneys have been swamped with new engagements and information requests from inquisitive clients and colleagues.
For this relatively small bar, crisis management with bet‑the‑company stakes is nothing new. Indeed, it’s what they do.
But that doesn’t mean this group of attorneys isn’t facing unforeseen challenges even as their workload ramps up. Like everyone else, they have been forced to navigate uncharted waters to meet their clients’ needs and will have to continue to do so in the weeks ahead.
Who Joined the Call?
The most immediate challenge for restructuring attorneys has been trying to meet their clients’ needs in the face of shelter-in-place orders. Restructuring work frequently requires a lot of face-to-face interaction.
Restructuring attorneys spend significant amounts of time at a client’s offices while preparing the client for a bankruptcy filing. Critical negotiations with creditors often occur in face-to-face meetings that go deep into the night. After the case is filed, these attorneys attend court hearings on a regular basis.
Indeed, virtually every action a company in chapter 11 takes outside of the ordinary course of its business requires notice to creditors and a hearing in bankruptcy court.
In the Delaware bankruptcy court, one of the busiest in the country for complex chapter 11 restructurings, a general order was entered in March declaring that all court hearings that are not “time sensitive” would be continued to a date on or after May 1.
The order also states that what issues count as “time sensitive” are to be determined on a case-by-case basis. In a legal practice where time is almost always of the essence, not knowing where courts will draw that line creates a great deal more uncertainty than restructuring lawyers are normally accustomed to.
For those matters deemed “time sensitive,” the proverbial cure may be worse than the disease. While the concept of a court hearing engenders images of two adversaries taking orderly turns to speak at the podium, bankruptcy court hearings in complex cases frequently involve representatives of a half dozen parties or more—many with competing agendas—and several contested matters on the agenda.
Bankruptcy courts are generally well-prepared to handle telephonic appearances, but those appearances are typically limited to parties that don’t intend to have significant speaking roles. Now with every party dialing in, including the presiding judge (by way of example, a high-profile contested hearing held in Houston on April 8 featured 134 parties on the line), restructuring attorneys are occasionally finding themselves in hearings that can devolve into unruly conference calls—complete with dropped calls, mute button mistakes, barking dogs, and unidentified, disembodied voices arguing over critical relief.
This reality is likely to force restructuring attorneys to work even harder to build consensus with different constituencies in order to avoid the need for contested telephonic hearings.
Hitting Pause or Starting Over?
While it may be some time before pandemic-related restructurings begin in earnest, the impact of the downturn is already being felt in cases that predate the crisis. At the heart of a successful restructuring is deal making—effectively convincing the “fulcrum” creditors to accept a compromise in lieu of full repayment.
Finding a resolution can take months of back-and-forth negotiations among multiple parties with competing interests. The prize at the end is a consensual plan of reorganization that is approved by the creditors and confirmed by the court.
But the Covid-19 crises has forced the parties in many restructurings back to the drawing board. With their revenues falling off a cliff, several retail companies that are currently in chapter 11 have sought to put their cases on temporary hold until the crisis passes. In the Pier 1 case, for example, the debtors have been granted for permission to “temporarily” stop paying landlords and make reduced payments of only “critical” expenses.
Other companies that are currently in chapter 11 will likely need a restart due to the drastic changes in the economic environment since their cases were filed. One of the highest-profile examples is the ongoing Alta Mesa chapter 11 case. The upstream oil and gas company had reached a deal to sell all of its assets, only to have the winning bidder declare it was simply unable to close the transaction because it couldn’t secure financing in this environment.
Another example is the Sanchez Energy case, where the parties seemed on the verge of mediating a deal for a plan of reorganization in early March. Three weeks later, the DIP lenders—usually at the top of the economic waterfall in a chapter 11 case—declared in court that they believed their position was underwater and ultimately declared that they intended to foreclose on the company’s assets. The issue was ultimately resolved when the debtors filed a plan that handed the keys to the company over to the DIP lenders, but for companies that are already in chapter 11, the delay (and accumulating professional fees) associated with this type of a “restart” can be devastating.
The challenges facing restructuring attorneys during the Covid-19 crisis are, in many cases, unprecedented. Some of these challenges will likely abate shortly after everyday life returns to normal, while others may have longer lasting effects.
In the meantime, restructuring attorneys will need to be able to quickly adapt in order to meet their clients’ needs in this environment, while clients and prospective clients may find themselves drawn to more sophisticated firms with strong resources and deeper benches that are better able to weather these new challenges.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Bojan Guzina is a partner in Sidley Austin’s Chicago office and a global co-leader of the firmwide restructuring practice.
Charles Persons is a counsel in Sidley Austin’s Dallas office and is a member of the firmwide restructuring practice.