Editor’s Note: This article provides a general overview of the current state of financial institutions’ resolution planning as required by the Dodd-Frank Act and is the first in a series of related articles.
With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in 2010, there is no denying that life as it was known at the time for large financial institutions was inexorably changed.
In today’s market place, many private-equity firms are focused on investing in “complex situations.” Complex can be interpreted as including high-growth companies with well-performing management teams in need of growth capital where the buyer will perform carefully-executed due diligence. Complex also applies to investments in overlooked, undermanaged and underperforming companies, which might include distressed businesses. Fewer private-equity investors compete for deals in this niche.
Many have reviewed the U.S. Supreme Court’s Till Opinion (Till v. SCS Credit Corp.) and walked away shaking their heads in confusion. The underlying case involved a higher-risk borrower who had purchased a used truck and shortly thereafter filed for bankruptcy under chapter 13. The parties asked the Court to choose the best method to determine a cramdown interest rate. It is important to realize that the Court was not addressing an all-inclusive list of methodologies available to financial practitioners, but was choosing from four methodologies previously used by various bankruptcy courts.
I am not an investment banker, so I’ve never had the benefit of really knowing what goes on in the head of one when deciding whether to take a particularly risky sell-side 363 sale engagement. But I have been through a few of these situations as an observer (or an attorney for one party or another), and, over time, I’ve seen something of a theme emerge: investment bankers underestimating—or completely overlooking—the risk of forfeiting a success fee if the assets simply do not yield enough money at auction to satisfy the senior secured debt.
One of the most significant challenges in managing a company through a restructuring, whether in or outside of chapter 11, is ensuring that critical vendors continue to provide goods and services to the company. Attempts to maintain strong vendor relationships are often undertaken in the face of vendors’ fears of their own financial losses in the event of a bankruptcy filing and concerns of “throwing good money after bad.”
Many turnaround experts believe that the key to fixing a distressed manufacturing company requires quickly turning assets, including idle factories or other underutilized facilities, into cash while simultaneously reducing expenses. However, selling a factory may not always be the best way to obtain value or minimize the costs associated with that asset.
Section 505 of the Bankruptcy Code allows trustees of debtor companies the opportunity to have a bankruptcy court potentially determine the amount of all tax liabilities during the course of a bankruptcy case. Section 505(b) also enables trustees to accelerate the resolution of tax issues, bring certainty in the amount of tax the estate may owe and close the of statute of limitations years ahead of schedule. Perhaps the most important advantage of using this provision is that it could eliminate any lingering trustee, officer and director liability in an expedited fashion.
The Bankruptcy Code strives to reach a balance between giving the debtor flexibility in making daily business decisions while at the same time limiting those activities which are deemed to be outside the ordinary course of business. [1] This limitation generally comes in the form of judicial oversight. Indeed, courts exercise varying degrees of scrutiny depending on the applicable Code provision.
Over the past year, much has been written about the coming “wave” of debt maturities; to add to the drama, some call it a tidal wave and others a tsunami. Regardless of the label that one uses, there is no dispute that several trillion dollars of debt will be coming due in the next few years. Much of that debt will be refinanced in the ordinary course because the borrowers have good businesses and adequate collateral.