Law360 (June 4, 2020, 4:58 PM EDT) -- In this edition of Coronavirus Q&A, Berger Singerman LLP co-chair and bankruptcy pro Paul Singerman talks about how the pandemic-fueled financial crisis compares with other economic turmoil he has helped clients weather and the challenges companies will face in the coming months.
This interview has been edited for length and clarity.
You've helped clients through the economic fallout of 9/11 and the 2008 financial crisis. How does the current crisis compare?
The current crisis is different in many profound respects from either the economic consequences of 9/11 or the Great Recession in 2008. Starting with 9/11, against the backdrop of the economic impact of the acts of terrorism, we had a profound coming together as a people in our country. It was palpable and it helped us through the tragedy and drama of 9/11. Yes, there were economic consequences. They were profound, but they were shorter-lived than either 2008 or what I believe regrettably will be the financial consequences of the pandemic.
In 2008, in the Great Recession, the consequences were wider on a macroeconomic standpoint. We had, on a less emotional level, some coming together with federal government support for what were then perceived to be key components of our national economic systems, major manufacturers that contributed substantially to our economy that received government assistance, and I think less divisiveness than now.
The current pandemic is unprecedented and more severe. Very few businesses are designed to withstand a virtual immediate cessation of top-line revenue. Very few. Even the most conservatively managed businesses that stress test their business planning have not before now, in my experience, designed or planned for a hard stop in revenue. And many, many of our businesses across a wide spectrum have experienced that. If we look at 2008, we had, especially in the Southeast and in the Sun Belt, a high concentration of economic disruption in real estate, in homebuilders and in all the companies in the trade cycle or supply chain of real estate and homebuilders.
Here, it wasn't limited to one sector or two sectors. It touched every single sector. We don't even know yet the magnitude of the pandemic on public sector economies. We've seen an unprecedented reach-out by the state of Illinois asking for federal government assistance to help it through its current economic plight, which has been building for years prepandemic. We've got local governments that are stressed now more than ever, specifically because of the demands of the pandemic. We're going to feel this profoundly in Florida too. Sales tax is a big part of our tax base. Tourism tax. There haven't been any tourists since the second week of March. When will people feel comfortable coming back? Regularly, not episodically for a weekend? When are we going to recover restaurant sales tax? Tourism tax revenue? There's a whole bunch of this story that in my view has not been told and will not be told fully for a while.
People ask me, "Are you busy?" I say "very." In 36 years of doing this, it's the saddest busy I've ever been.
How are you advising debtor clients in this crisis?
The first and easiest answer is: Try to hoard cash. Do what you are able to do to establish and preserve access to credit. Take care of yourselves in terms of senior management, making the decisions and navigating the restructuring in or out of court. Try to take care of your employees and be honest with them. Be honest with your key creditor constituents. Try to be responsive to your customer base to whatever extent you are able while complying with local rules and ordinances regarding social distancing.
For a business today to forecast revenue months or years out is more challenging than I've ever observed it to be, and that's because of the uncertainty, especially for larger businesses that operate in broader geographic regions to predict what the regulations will be regarding occupancy, whether it's in a restaurant, airplane, cruise ship, a retail store. And then when one commits to whatever one is going to forecast, for sellers of goods, how does the business preparing the forecast dial in these same issues in foreign countries that contribute to the production of the products that they sell?
This isn't the same kind of uncertainty where one has to make a bet on the efficacy of marketing campaigns and consumer buying habits. It's much more complicated than that. And in the face of that uncertainty, how do these businesses manage their dealings with their creditors? And how do lenders and investors evaluate the soundness and reliability of forecasts in what I believe to be truly unprecedented times?
How is your firm preparing for the expected increase in bankruptcy filings? Has your practice changed during the pandemic?
We've had meaningful support from our deal lawyers who regularly support the restructuring team as well as our dispute resolution lawyers. Much of our work now is still in out-of-court matters. What we're endeavoring to do for the larger financially distressed business clients is being prepared to file Chapter 11 cases and continuing in our usual practice of making efforts to avoid the filing of Chapter 11 until it is absolutely necessary or until it is part of a consensual plan with our key creditor constituents.
We as a firm have always believed that except for clients in certain industries in which there are particular advantages provided for in the Bankruptcy Code, we usually view bankruptcy as one of the last alternatives.
Here, today, the easy part for a company is getting into bankruptcy. The more challenging part has been: What's the plan to exit bankruptcy? In the circumstances I described of forecasting future economic performance being more challenged because of the pandemic, we're looking harder at the solutions to get out of bankruptcy and dialing that into our thinking and the advice we're giving clients about seeking bankruptcy protection in the first place.
Today if we're going to file a Chapter 11, and it's going to be a sale-based Chapter 11, and because of the challenges in forecasting future financial performance, what's that tell us about the likelihood of either strategic buyers or financial players being willing to write a check now to buy a business out of bankruptcy? It's going to have to be a pretty big deal to part with cash to make an acquisition today and take on a new line of business or make a serious commitment to expanding a footprint today. We're not seeing a lot of it.
When we're advising clients on the benefits and detriments of filing bankruptcy today, one of the things we're saying is: Where are we going to get the capital to operate through bankruptcy and where are we going to get the capital to emerge from bankruptcy?
Certain companies aren't going to have a choice. They're still going to be forced because of the contractual terms of their debt or the financial distress of their own lenders or stakeholders. We'll have to do hard work to bring the creditor constituencies together before the bankruptcy. We're thinking harder about what we're going to use the bankruptcy for and how our clients are going to get out of bankruptcy than we did prepandemic.
Let's talk Florida. Many of the largest restaurant groups are headquartered in Florida. The cruise lines are here. These are industries that have been hit particularly hard in the pandemic. What do you expect to see in the hospitality space?
I think in the hospitality sector, the businesses that are more highly leveraged and that don't have access to capital and that didn't have access to capital prepandemic in the form of additional debt financing are going to have an increasingly challenging time or an increased challenge in surviving. The businesses that were less leveraged and had access to capital and that drew down on it or ensured that they had the continued ability to draw down on it will have a better prospect of making it through.
That applies across the board in the hospitality sector, like hotels. You can't sell a hotel room in June that wasn't slept in in May. If you didn't earn that revenue in the past, you can't make it up. We've got anxiety in every aspect of hospitality. Even though restaurants are open at 50%, some people aren't coming back to restaurants because they're anxious about what the experience will be. Same for flying on airplanes, same for going to retail stores. It's going to take capital to make it through.
Do you expect to see any of these filings in Florida as opposed to Delaware or New York?
From a parochial perspective I hope so, and I don't say that only because of economic self-interest for Berger Singerman. We have an extraordinarily talented and hardworking group of bankruptcy judges in every district in this state. Our judges, in addition to carrying a huge number of consumer cases, are very sensitive to and respectful of the needs of Chapter 11 debtors. I think the bankruptcy courts in Florida are efficient. They want to get it right, they generally get it right. They rule promptly. They're sophisticated.
A case feels differently, in my experience, when it is filed in the jurisdiction in which the company is based. I think it matters to a bankruptcy judge that she or he is adjudicating matters that matter locally. It appears that restructuring lawyers who regularly represent large Chapter 11 debtors are indeed continuing to file cases in Delaware and the Southern District of New York but are also experimenting with these other jurisdictions, and I think that's going to continue to happen.
--Editing by Aaron Pelc.
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