In ordinary times, I write about important developments in big-ticket litigation. Obviously, these are not ordinary times. COVID-19 – and the economic consequences of mitigating the spread of the virus – has suddenly become the most important legal story of the decade. Perhaps of the century. So that’s the story I’m going to tell in my columns: how lawyers are helping their clients navigate once unimaginable problems, often working in circumstances that would have seemed unthinkable at the beginning of this month.
Consider Paul Leake and Lisa Laukitis, corporate restructuring partners at Skadden Arps Slate Meagher & Flom. For weeks, the pace has been unrelenting. “We are all working literally around the clock,” said Leake, who heads the group and is working from his house in the New York suburbs. Laukitis, meanwhile, is hunkered down in what had been an ad hoc home office. She invested in a keyboard and a mouse after a couple of days working on a laptop, but she’s still trying to explain to her 7-year-old son why she’s spending 12 hours a day on the job.
"It’s been unbelievably challenging to deal with working from home with a child at home — the distraction and his needs,” she said. “It’s confusing for him to have so much access to me in some ways but for me to be so unavailable to him in others. We get to eat three meals a day together but other than that, I’m holed up in my office.”
Leake told me he’s been juggling as many as 15 client matters a day. Laukitis said she’s counseling between five and eight clients a day, some staring at the imminent prospect of default “because their numbers have changed so drastically in such a short period of time.”
Laukitis said much of her time has been dedicated to negotiations with clients’ banks, asking for “forbearances or other covenant relief for the near term until we see how things stabilize.” Last week, she said, a priority for her clients was drawing down on credit revolvers for short-term liquidity. Most banks, she said, agreed to fund the revolvers. But as businesses continue to feel the effects of shutdowns and supply chain disruptions, Laukitis said it will get tougher: “We’re going to be dealing with redeterminations of borrowing bases, requests for covenant relief. It’s going to depend on the industry, the strength of the business overall, what relief companies are able to get.”
It’s becoming increasingly likely, Leake said, that the impact of COVID-19 will not be what he called a short-term belt tightening, but instead a steeper and more protracted downturn. As Skadden wrote in a March 4 client alert that now feels like ancient history, the first big Chapter 11 filing attributable to the coronavirus was a medical technology company called Valeritas, which suffered a liquidity crisis when China shut down the factories that supply and manufacture its flagship insulin patch. Valeritas entered bankruptcy in February. Since then, Leake said, there have been a number of Chapter 11 filings by relatively small companies affected by COVID-19 – but medium and large companies will also have to resort to Chapter 11 before long.
Leake and Laukitis said their goal is to keep clients out of formal Chapter 11 proceedings, if it’s possible to do so through negotiations and restructurings. “It’s not in the interest of creditors,” Laukitis said, “for all of these companies to go crashing into Chapter 11.” .
To that end, Leake said he’s been asking clients to consider the same set of questions as they begin to confront the uncertainty of COVID-19’s impact.
1) How much cash or other sources of liquidity do you have? “What’s your runway, sitting here today, so we know how much time we have to figure out exactly what needs to be done, either operationally or in business planning,” he said.
2) What levers can you pull to extend that runway? “We put that into the very short term,” Leake said. “What can be done immediately and what are medium and longer term (actions) that if you start now will help you later on - to the extent that you can get there.”
3) What are the constraints and limitations in your debt documents and contracts?“We ask that so we know how much room we have to maneuver within the documents as they exist today without defaulting,” Leake said.
4) Who are your stakeholders, both in your capital structure and operationally?“With respect to each constituency, we go through what are their particular motivations, rights and obligations,” Leake said, “so you begin to very early understand what the table looks like.” Leake said his team is trained to remind clients constantly about the negotiating table - who will be sitting on the other side, what they want and what leverage they can exercise. “You want to be thinking about the long term even as you address your short-term issues,” he said.
Addressing those four questions, Leake said, will streamline the analysis of a company’s options as the crisis wears on. The key, Laukitis added, is developing a plan with different decision points depending on how long the economy is repressed. A roadmap, she said, “enables management to be more prepared but also shuts out some of the short-term noise of the crisis.”
Leake and Laukitis said that for some clients, the COVID-19 crisis is an opportunity. Companies holding cash can take advantage of lower corporate debt prices and buy back their bonds on the cheap. Even businesses that don’t have that kind of liquidity, Laukitis said, may be able to conduct debt exchanges to buy themselves some time, offering debtholders new securities with different covenants or longer maturities. Cash-rich companies, the Skadden lawyers said, may be able to capitalize on lower equity prices to buy rivals. They’re also anticipating deals involving distressed debt hedge funds and private equity funds.
But as Chapter 11 becomes inevitable for some companies, she added, it’s going to be a whole new challenge to prepare the cases. Typically, Skadden urges clients to bring a financial advisor and some lawyers to corporate headquarters well in advance of a bankruptcy filing. “How does that happen now, where employees are working from home and people are not traveling?” she said. “I think that we will have to develop a new playbook.”