Articles & Media

Asking the Tough Financial Questions E3 Newsletter, Institute For Supply Management By Kenneth A. Rosen Find out the truth and protect yourself when a supplier seems to be in financial distress. There have been a number of high-profile cases of companies dealing with bankruptcy and other financial problems recently, and many businesses are now taking a closer look at their partners and suppliers to head off potential issues. However, when a supplier is in financial distress, it won’t always be obvious that there is a problem. Fortunately, there are almost always signs signaling that you need to delve deeper to find out the financial truth. Perhaps you’ve noticed slower or late deliveries from one of your longtime parts suppliers. You’re concerned that if the supplier continues to fall behind schedule — or worse yet, fails to deliver altogether — a ripple effect will disrupt your company.

This comprehensive guide, presented by a seasoned Senior Restructuring Professional, addresses the diverse spectrum of restructuring solutions, including Chapter 11 reorganizations and financial restructurings. Engaging with various industries, the advisor collaborates closely with debtors, creditors' committees, lenders, landlords, and other stakeholders. Key Insights: Early Warning Signs: Drawing inspiration from the Quiznos case study, the article emphasizes the importance of recognizing early warning signs, such as declining financial metrics, shareholder actions, and forbearance agreements. Timely identification allows creditors to adapt strategies and mitigate potential credit exposure. Legal Frameworks: Exploring legal avenues, the guide highlights the Restatement (Second) of Contracts and the Uniform Commercial Code (UCC). It guides creditors on legally permissible modifications to credit terms, enabling them to demand "adequate assurance" when a customer's financial health is uncertain. Adequate Assurance Demands: The article provides practical examples of "adequate assurance" demands, including deposits, security interests, and letters of credit. It underscores the importance of documenting warning signs to justify such demands and advises on careful execution under legal counsel. Conclusion: In a dynamic financial landscape, creditors are empowered to navigate uncertainties associated with potential bankruptcies. This guide equips them with proactive strategies to identify warning signs, leverage legal frameworks, and demand adequate assurance. By adopting these measures, creditors can fortify their positions and minimize potential losses in the event of customer bankruptcy or insolvency relief.

Section 363 Has Become An Alternative That Poses Problems

This article delves into the complexities of credit risk analysis, emphasizing the need to go beyond traditional balance sheet assessments. The seasoned perspective of a bankruptcy attorney is utilized to uncover often overlooked liabilities and assets that significantly impact credit risk evaluations. Hidden Liabilities: WARN Act Claims: Liabilities under the WARN Act, relating to employee compensation upon termination, can dilute recoveries in bankruptcy and may not be apparent on balance sheets. Environmental Obligations: Cleanup costs arising from business closures may not be fully disclosed, impacting recoveries with potential payment priority. Contract Rejection Claims: Damages from lease or contract terminations, often absent from balance sheets, can affect the recovery pool for general unsecured creditors. Underfunded Pension Obligations: Common in low-interest-rate environments, underfunded pension obligations are often understated on balance sheets. Intellectual Property Valuation: Subjective valuation of intellectual property can affect bankruptcy proceedings, where underutilized assets may not be apparent. Unseen Assets: Lease Portfolios: Real estate leases, assignable in bankruptcy, may not be fully considered on balance sheets, impacting liquidation analyses. Strategic Intellectual Property Use: Evaluating the full exploitation of intellectual property becomes vital in bankruptcy or restructuring, uncovering additional revenue streams. Mitigating Downside Risks: Prudent credit executives recognize that balance sheets offer only a starting point. The article emphasizes the high costs associated with bankruptcy and the often unquantifiable impact on asset values. A comprehensive risk analysis considers market conditions, regulatory requirements, and contingent assets and liabilities. Conclusion: Unveiling hidden risks in credit risk analysis involves a holistic approach, acknowledging the limitations of balance sheets. By understanding and evaluating these overlooked factors, credit professionals can enhance risk assessments, ensuring a comprehensive grasp of a customer's financial health. In a landscape where bankruptcy impacts stakeholders, this approach is crucial for minimizing losses and navigating credit risks effectively.

When a community hospital closes or is sold to a for-profit operator, there is a loss to the community. Despite protestations by for-profit operators, a community loses something of value by the conversion of a nonprofit hospital to a for-profit hospital. The mission statements are different. The question is how the loss gets valued and whether the community is compensated for the loss. Societal benefit played a role in the development of bankruptcy law in the U.S. And it should play a role in the allocation of proceeds from the sale of a nonprofit hospital. According to an article by University of New Mexico law professor Nathalie Martin, the U.S. bankruptcy system is among the many social programs that address society’s ills. Our bankruptcy laws recognize the impact of a chapter 11 case on society and vice versa. Thus, the impact of society (aka the “community”) on a chapter 11 case and the impact of a chapter 11 case on society are appropriate considerations for how assets are divided in a bankruptcy case....

A New York Times article published in October discusses how litigation financing may warp the legal system. The author posits that litigation finance gives rise to a litigation arms race, with speculative money aggravating the already-high costs of the American legal system. The article says: “It’s hard to imagine how billions in outside capital won’t end up changing the justice system. The only question is how.” In the world of bankruptcy, there has evolved a vibrant market for trading unsecured claims. Trade creditors often are almost as desperate for cash as their customer in chapter 11. They may not understand the extra value of priority claims. They usually do not have a feel for the dividend that the case likely will yield. Their experience probably is that it takes too long to see a dividend, making fast money attractive....