When Financial Stress Turns to Distress–Restructuring Tools to Avoid Disaster Parts 1 and 2: Chapter 11 Checklist and What Else Is in the Toolbox

Part 1: Chapter 11 Insights and Beyond

As businesses grapple with financial challenges, Lowenstein Sandler's Bankruptcy, Financial Reorganization & Creditors’ Rights Department presents a comprehensive guide to various restructuring tools, offering insights to help navigate these turbulent times. In this multi-part series, we delve into Chapter 11 bankruptcy and other alternatives, equipping businesses with strategies to mitigate risk and chart a path to financial stability.

Chapter 11 Bankruptcy Insights

Chapter 11 bankruptcy remains a key financial restructuring tool, empowering businesses to reorganize, shed burdensome contracts, and sell assets under Bankruptcy Court supervision. Key advantages of Chapter 11 include:

1. Automatic Stay Protection: Immediately freezes lawsuits and collection efforts against the company upon filing the petition.

2. Contract and Lease Flexibility: Allows shedding or selling contracts and leases, providing operational relief.

3. Asset Sale Benefits: Permits selling assets free and clear of liens, claims, and encumbrances, maximizing value.

4. Debt Restructuring Options: Facilitates consensual or contested debt restructuring, allowing renegotiation of labor contracts and pension obligations.

5. Employee Incentive Programs: Employs tools like the Key Employee Incentive Program (KEIP) and Key Employee Retention Program (KERP) to motivate and retain key personnel.

6. Operational Right-Sizing: Enables closure of facilities, workforce management, and modification of collective bargaining agreements.

7. Stakeholder Communication: Requires effective communication with creditors, employees, unions, and other stakeholders with diverse motivations.

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Navigating Pre-Bankruptcy Considerations

Prior to filing Chapter 11, businesses must engage in strategic planning, addressing critical aspects such as:

1. Stakeholder Control: Identifying creditors with the potential to influence the case outcome.

2. Debt Document Review: Scrutinizing debt documents for errors, lien defects, and guaranties.

3. Negotiating Forbearance: Discussing default status and negotiating forbearance arrangements with lenders.

4. Financial Analysis: Conducting a detailed financial analysis and preparing projections.

5. Creditor Group Formation: Responding to the formation of ad hoc creditor groups, a common pre-restructuring practice.

6. Lender Negotiations: Negotiating financing terms, including over-advances, collateral use, and additional demands.

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Outlining Potential Pitfalls and Planning Strategies

While Chapter 11 offers valuable tools, careful planning is crucial to avoid potential pitfalls. Key considerations include:

1. Secured Lender Engagement: Initiating discussions with secured lenders well before bankruptcy filing.

2. Financing Negotiations: Addressing debtor-in-possession (DIP) financing for working capital and professional fees.

3. Critical Vendor Engagement: Identifying and engaging critical vendors, ensuring a stable supply of goods and services.

4. First Day Motions: Preparing essential "first day" motions for tax, insurance, cash management, and vendor agreements to continue business operations.

5. Asset Sales: Implementing asset sales and prepetition marketing processes.

6. Tax Ramifications: Addressing tax implications, including preservation of net operating losses and avoidance of cancellation-of-indebtedness income.

Beyond Chapter 11: A Glimpse into Alternative Restructuring Tools

In addition to Chapter 11, businesses can explore various alternatives for financial restructuring:

1. Out-of-Court Workouts: Collaborative debt restructuring with lenders and creditors.

2. Consensual Debt Restructuring: Forbearance, waiver of defaults, and debt exchange for equity or new debt.

3. Assignment for the Benefit of Creditors (ABC): An orderly liquidation proceeding under state law.

4. Court Receivership: Involuntary liquidation invoked through judicial proceedings.

5. Uniform Commercial Code Article 9 Sale: Voluntary or involuntary foreclosure and sale by a secured party.

6. Shutdown or Dissolution: Business closure as a last resort.

   
   

Conclusion

Restructuring is not one-size-fits-all, necessitating early consultation with a multidisciplinary team of restructuring advisors. Lowenstein Sandler's Bankruptcy, Financial Reorganization & Creditors’ Rights Department stands ready to guide businesses through the entire restructuring process, providing strategic planning, negotiation, and implementation expertise to achieve optimal outcomes. Stay tuned for upcoming parts of this series, exploring in-depth insights into alternative restructuring tools