Briefly Speaking: The Four Stages of the Bankruptcy Life Cycle
CSC’s annual Briefly Speaking webinar series helps legal professionals tackle every day and rising challenges facing the industry. In this installment of Briefly Speaking, join us for a look at the bankruptcy life cycle.
As the market deals with the economic impact of COVID-19, many are expecting an uptick in corporate restructurings and bankruptcies. Join this 30-minute webinar to gain a deeper understanding of a U.S. bankruptcy proceeding before the expected increase and give yourself a competitive advantage.
Our team of experts will discuss the ins and outs of each of the four stages:
- Filing decision
- Exit financing
- Post confirmation
Disclaimer: Please be advised that this recorded webinar has been edited from its original format, which may have included a product demo. To set up a live demo or to request more information, please complete the form to the right. Or if you are currently not on CSC Global, there is a link to the website in the description of this video. Thank you.
Annie: Hello, everyone, and welcome to today's webinar. Briefly speaking, "The Four Stages of the Bankruptcy Life Cycle." My name is Annie Triboletti, and I will be your moderator.
Joining us today are Michelle Dreyer, Adam Berman, and Helena Ledic. Michelle is the Managing Director of CSC Global Financial Markets and its subsidiary, Delaware Trust Company, leading independent director and default administration. She oversees independent director services and default administration services. Adam is the Managing Director for Trust and Agency Services at Delaware Trust Company, which is a wholly-owned subsidiary of CSC. He is responsible for expanding the corporate trust services of Delaware Trust Company and has more than 25 years of experience in the corporate trust business. Helena is the Associate General Counsel for CSC in the Chicago office. She is a business attorney advising senior management and law firms on strategy, business, legal, and technology matters.
And with that, let's welcome Michelle, Adam, and Helena.
Helena: Thank you, Annie. And before we get into the life cycle stages of the bankruptcy, a little bit about CSC. We work with more than 10,000 law firms and 3,000 financial clients. We have over 180,000 corporate clients. We protect more than 65% of the 100 best global brands, and we serve 90% of the Fortune 500. We've been named a top workplace for 13 years, and we're headquartered in Delaware and have more than 50 office locations worldwide.<.p>
Delaware Trust is a leading, non-lending institution of corporate trust and agency services. It's a wholly-owned subsidiary of CSC and is fully regulated. It's independent and stable. It's been privately held for more than 120 years. The people who work with Delaware Trust are experienced. The best-in-class experts are hired from finance, legal, and the banking industries. It's well capitalized. There's over $100 million surplus. And what we're very, very proud of is that we are ranked best-in-class for service with an 84 Net Promoter score.
And now, let's talk about the agenda for our four stages of the bankruptcy life cycle. Adam and Michelle are going to walk us through the introduction and background. Then we're going to go into the Stage 1, the filing decision. The bankruptcy is Stage 2. Stage 3 is the exit financing. And then we'll go into the post confirmation for Stage 4. And then we'll cover any questions at the end.
And now, Adam is going to take us into the reasons why companies borrow.
Adam: Companies of all industry types will borrow money to fund their operations regardless of the industry. So typically, for example, with real estate, they'll borrow money to expand and get new properties. Funding operations by purchasing raw materials, producing inventory cost money, and in acquisitions, buying other companies, doing M&A activities, these are typical examples of why companies would borrow.
So when companies borrow, they typically do that as a debt issuance. The two typical debt issuances that companies will use for borrowing are either a corporate bond issuance or a loan, typically a bank loan, but it can be from a non-bank entity who's lending the money. With a corporate bond issuance, it will require them to have an indenture trustee, paying agent, and registrar, and sometimes a collateral agent if it's a secured bond. Likewise, for a loan, it will require an administrative agent and a collateral agent as well if it is a secured borrowing.
Helena: And now, for our first audience poll question. We'd like you in the audience to click on the option for what you think is the most likely asset class to have the highest corporate bankruptcy filings post-COVID. And while we're waiting for you to select something, Michelle, why don't you tell us, from your perspective, what do you see out there?
Michelle: Of course, thanks, Helena. From my perspective, I think that commercial real estate is going to be the hardest hit post-COVID. We're seeing a change in how retail happens. We're seeing a change in how offices happen and will we be returning to offices. All of that is a commercial real estate, and we're going to see over the next year or so changes to the market and an uptick in the number of filings. Adam, did you have any additional thoughts or other industries that you think may have an issue?
Adam: Yeah. Thanks, Michelle. I can't say that I'm not going to agree with you that commercial real estate would probably be the top pick for me. What I would also probably throw in there as well is brick-and-mortar retail, which will also kind of affect commercial real estate. And if I was going to pick another asset class, it would probably be hospitality as well, which, of course, would fall back to commercial real estate. So that's really my take on it, Michelle.
Michelle: Thank you, everyone, for answering our polling question. And we are now going to look at the filing decision and how companies get into a distress situation.
There are many reasons a company may fall into financial distress. Some of them are general economic issues stemming from a myriad of different reasons. Think about political unrest in the world, financial market insecurity. There could also be unique circumstances particular to a company or industry, such as downward trends in gas and oil prices or the changing landscape of the retail industry. And thirdly, bad management. Even good companies may wind up with bad management, and bad management doesn't always mean a bad person. It's where, you know, the company is taken in the wrong direction by management or management doesn't keep up with their changing markets.
Once a company gets into financial distress, it does have options. The company can try to avoid a bankruptcy and should explore its options before filing a bankruptcy as bankruptcy is actually very expensive. A company considering filing for bankruptcy should engage advisors, both restructuring attorneys and potentially financial advisors. They should attempt to work out defaults or pending defaults with their creditors by renegotiating the terms of their loans or bond debt, including requesting rate concessions and maturity extensions.
They can also raise new capital through new loans or bond offerings to provide for new liquidity or to pay off some of those loans or bonds that have higher interest rates or pending maturities. And they can also offer new equity to the market to create liquidity.
During the period when a corporate family is exploring their options, it should think about the entities they will include in a potential filing. If any of the entities are bankruptcy remote entities, it is important to engage with the independent directors as early on in the process as possible in order to get all of the appropriate approvals if a bankruptcy is on the horizon.
After the company has explored its options with its advisors and has determined that filing for bankruptcy is the best option, the company needs to collect information to prepare a bankruptcy petition. The bankruptcy petition will need to include the company's assets, their income, expenses, and debts, including a list of the company's top 30 unsecured creditors.
The company with its advisors will also need to determine the type of bankruptcy they'll file. The most common types for corporate entities are Chapter 11 or Chapter 7. If filing for protection under Chapter 11, the company will also consider if it will be a debtor in possession, where it maintains its own management or not.
Now that the company has made the decision to file and decided what type of protection they are seeking, they will then need to think about how the company will finance the bankruptcy process and have added liquidity for day-to-day operations, either through a debtor in possession or DIP loan, petition the court for use of cash collateral, or both.
They need to review their capital structure to discover any potential conflicts of interest for various agents within the capital structure, including the indenture trustee for various bond issues or the loan agent for their loan facilities.
They also need to think about what committees may be formed throughout the bankruptcy process. There are two that are typical — unsecured creditors' committee. The unsecured creditors' committee is a staple of corporate bankruptcy cases, and they are required under the bankruptcy code. However, an equity committee may also be formed. An equity committee is not a required committee. In order for an equity committee to be appointed, an equity holder must petition the court and the judge must approve the formation of the equity committee, which is fairly uncommon.
The company also needs to create a plan of reorganization. All debtors have to create a bankruptcy plan that lays out how a company will exit bankruptcy. The plan may have been pre-negotiated in a restructuring support agreement before a filing and is called a pre-pack in the industry. If there is no restructuring support agreement, the company has more work to do to create its plan. This type of bankruptcy is considered a free fall.
Whether the debtor has filed a pre-pack or a free fall bankruptcy, there will need to be continued negotiations. During the process of the bankruptcy, creditors may file objections either to the restructuring support agreement if they were not parties to it or to the debtor's plan of reorganization.
The company will also need to create classes of claims. In order for a debtor to have its plan approved, at least 50% of creditors and two-thirds of each claim class must vote to accept the plan. Once the creditors have voted to accept, then the court must also approve the plan.
After the plan is approved by the judge, the plan will have an effective date. On the effective date, creditors who are to receive payment under the plan receive their payments. Bondholders are paid through the indenture trustee. Lenders are paid through their loan agent. And other types of creditors may be paid directly by the debtor through a distribution agent.
Adam: After the plan is confirmed, the payment date for all creditors will be called the effective date. On the effective date, creditors in this company will receive their post-bankruptcy distributions. Often, they will have exit financing to finance that. That will take place in the form of new bonds and new loans that the company needs to emerge from bankruptcy as a new, healthy company and to also make those distributions to creditors in the case.
Michelle: If there are any residual issues that have not been resolved through the bankruptcy process, the plan may also provide for some post-confirmation work to be done after the effective date. The plan may create post-confirmation litigation or liquidating trusts where trustees will be appointed. Court ordered assets are then transferred to the trust created by the plan. The litigation or liquidating trustee handles all aspects of settling claims. Once all claims are settled, funds are distributed to creditors by a disbursing agent. This will complete the bankruptcy process.