As everyone is aware, certain states and cities have required that restaurants, bars, health clubs, movie theaters, ambulatory elective surgery centers, and all non-essential business operations close immediately in response to the COVID-19 pandemic. This forced business closure is virtually unprecedented in today's times and will affect every aspect of society and the economy. These closures will have a "ripple" effect on other businesses and is further complicated by the turmoil in the stock market. All these factors point to an impending recession.

Many companies are facing liquidity concerns as a result of having to close their doors to the public. No one could have seen this coming; however, we offer the following considerations for companies experiencing distress as a result of COVID-19.

  • Be aware of legal ramifications of business decisions you are making as a result of COVID-19. Does firing your work force trigger a state or federal WARN Act notice? Does favoring certain creditor constituencies over others put you at risk for claims of breaching your fiduciary duty? Does not trying to save the business put you at risk? Do not overreact to try and rectify a situation out of your control. Patience may lead to options that you did not know existed.
  • Be proactive. Whether it is to update your financial projections, staffing needs, or operational budget, companies need to be proactive about their future economic condition, which includes a review of existing loan documents and financial covenants.
  • Communication with your key constituencies is paramount in these times. A company facing a liquidity crisis must keep its secured lender and other key creditors informed.
  • Lenders are aware of the current economic climate, they do not want to face a default under their loan documents, and they surely do not want to see the collateral that secures their loan diminish in value. Most lenders have a distressed or special situations team that routinely deals with these types of crises. A company facing the possibility of missing an interest or principal payment needs to address the situation with its secured lender in advance of any default. Do not underestimate the impact that a conversation with your secured lender may have as there are options available to you that could stave off a bankruptcy filing or the lender's exercise of remedies by providing forbearance, standstill, or other relief from the strictures of your loan documentation.
  • Rent will be of particular significance for a distressed retail company. Given the cessation of business operations, revenue expectations may not be met. Again, communication is the first line of defense. Keeping your landlord appraised of economic difficulties in these trying times will prevent them from being caught off guard when the rent check does not timely arrive. Similar to your secured lender, your landlord does not want to face an empty store front with no tenant when we emerge from this pandemic. Discuss rent forgiveness or rent forbearance with your landlord if your company is facing liquidity issues. Although a bankruptcy filing may keep the doors open, the cost of a bankruptcy can be overwhelming when you may have been able to address the situation through an alternative pay arrangement with your landlord.
  • Engage your board of directors and equity security holders and keep them apprised of the company's situation. Boards are typically comprised of members with experience dealing with distressed situations and are an important venue for confidentially discussing potential options. Consider independent board members that can provide an outsider's perspective on transactions.
  • "Cash is King" Focus on cash. When a company starts experiencing financial distress, cash balances can fluctuate week to week, vendors tighten terms, companies "rob Peter to pay Paul," each of these are signs the company should put together a 13 week cash budget that projects revenues and expenses and track budget to actual. Seeing your cash flow on paper can often show you where you spend too much and allow you to observe financial forests you cannot see while living in the trees.
  • Review incentive plans and make sure they are not creating disincentives to improving performance. These pans are often created with great expectations of growth and profits. In distressed situations, paying bonuses of executives or employees may not only be unwise, but create exposure.
  • Exhaust all options! A lack of liquidity from a situation completely out of your control does not mean you should throw in the towel. Forbearance, forgiveness, furlough, are only some of the options.
  • Finally, professionals skilled in distressed situations can assist you through these rough times. This often starts with financial advisors or independent board members with distressed experience.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.