The coronavirus crisis has forced businesses to firefight but more profound restructurings will be needed

As businesses strain every sinew to survive the coronavirus crisis, Mohsin Meghji has a simple message: the first battle is about attitude.
“A lot of companies are not used to living poor and that’s the mindset we are trying to implement,” said Mr Meghji, founder of M-III partners, a New York-based consultancy focused on financially distressed companies. 
The firm is just one of a small army of specialist consultants, lawyers and bankers offering shell-shocked companies a crash course in how to survive a global economy in lockdown, industries from retail to auto manufacturing in shutdown and anxious investors.
The gamut of measures available to companies runs from the straightforward deferral of interest payments and extension of debt maturities to creative financings and bond exchanges. All have significant implications for shareholders, creditors and employees facing a world that few could have imagined just months ago.
If the crisis has forced companies into a radical reordering of priorities, it has also demanded swift action. Last month, US companies tapped banks for more than $100bn from revolving credit facilities, a sign of the scramble to preserve cash. 
Restructuring consultants, whose ranks include AlixPartners and Alvarez & Marsal, say it is one lever boards have pulled to weather the intense turmoil of recent weeks. Stretching out payables to vendors, collecting receivables more aggressively and quick asset sales are among the other weapons in a company’s arsenal.
The firefighting has had one overriding aim: buying time.
“Once you get a handle on liquidity, then you have a pretty good idea of how much time you have to figure out options but ideally that will be three to six months,” said Mr Meghji, whose firm embeds consultants inside a company’s finance department.
While global stock and corporate debt markets remain far below their highs, the past two weeks have offered a degree of respite for businesses racing to shore up their finances.
Yum Brands, the owner of the KFC, Taco Bell and Pizza Hut franchises, raised $600m in high-yield bonds at the end of March. Within days, stricken cruise operator Carnival followed suit. Other companies are now scouring their legal agreements with banks and bondholders to see if they can take on new debt.
Government action over the past two weeks has offered hope. Countries from the UK to Germany have passed stimulus packages whose scale dwarfs those of the financial crisis. In the US, the $2.2tn package, known as the CARE act, established a $349bn fund for small businesses while earmarking $500bn for larger enterprises. Late last week, the Federal Reserve pledged a further $2.3tn in support.
Indeed, restructuring advisers are not anticipating a sudden wave of bankruptcy filings — a last resort given equity holders are typically wiped out.
“We are still several weeks or months away from a wave of bankruptcies for previously healthy companies,” said Steve Zelin of PJT Partners, the advisory boutique hired by the US Treasury to work on a bailout of the airline industry. “It will all depend on how long the broader economy is shut down. If the economy starts picking up, those businesses who were in good financial health before the crisis will emerge without the need to restructure.”
But with economists believing a deep global recession is already under way, more companies and their creditors will need to consider steps that go beyond the firefighting of the past month.
Businesses can start negotiating with lenders and landlords for relief from covenants that demand certain financial metrics are met. With the possibility that a recession could be violent but also brief, some creditors may decide to defer interest or lease expenses to avoid messy foreclosures and evictions. 
However, for those companies permanently shrunken by the crisis — and not easily able to access new money — more aggressive surgery to their capital structure may be needed. Businesses can, for example, repurchase their own debt for say 70 cents on the dollar, locking in the benefit of the fall in price. 
Indebted companies can also embark on “exchange” offers, where investors swap their existing debt for new bonds with longer maturities. If successful, companies secure more time to emerge from trouble while bondholders typically pocket a higher coupon rate, a small fee and, in some instances, higher priority in the capital structure.
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Although the decision to shut down swaths of the global economy is unprecedented, the pain now felt is made worse by the last decade’s borrowing binge. The US leveraged loan and high-yield bond markets — where the riskiest companies borrow — have each ballooned to more than $1tn in size.
Default rates on corporate loans and bonds are now forecast to spike beyond 10 per cent. The number of companies whose credit rating has fallen to B3 or lower, or near the bottom rungs of junk status, has spiralled to more than 300, according to rating agency Moody’s. That is already higher than the 2008 financial crisis peak. 
It is for such companies that creditors may reserve even more severe steps.
One option is a so-called “distressed exchange” offer, where companies forestall a bankruptcy by giving investors a steep discount on the value of their bonds in the form of new debt, stock or cash. Such deals often occur at private equity-backed companies saddled with debt, as they allow the buyout firms to stay in control.
“By nature, private equity and hedge funds are financial engineers,” says Michael Kramer, founder of restructuring investment bank, Ducera Partners.
Envision Healthcare, a US supplier of medical staff that was bought by KKR for $9.9bn in 2018, is now seeking to swap more than $1bn of junior bonds for senior loans whose face value would be just 35 cents on the dollar. 
Following the financial crisis, several private-equity backed companies were kept alive in this way as “zombies” in the hope that an economic upswing would eventually revive them.
And, sometimes, it did.
Blackstone’s 2007 buyout of Hilton Hotels for $26bn eventually came good. However, in the case of Toys r Us, acquired by a consortium including KKR and Bain Capital in 2005, kicking the can down the road proved disastrous. 
But with governments signalling that the lockdowns may need to be extended, Chapter 11 bankruptcy may be the only option for the weakest US companies.
Formal bankruptcy proceedings typically force owners to turn over the keys to creditors. But they also give companies a reprieve from their obligations, space to develop a blueprint for survival and a judge to supervise the process. 
“The advantage of bankruptcy is that it offers a breathing spell,” said Nicole Greenblatt, a bankruptcy attorney at Kirkland & Ellis. “Chapter 11 can stop lawsuits, facilitate access to cash, allow companies to terminate unprofitable leases and contracts, allow a company to de-lever or even sell itself. The downside is it can be expensive and time consuming, however.”
If the number of bankruptcies and administrations has been small so far, some companies have already been pushed over the edge.
Earlier this month, long-troubled US shale driller Whiting Petroleum filed for bankruptcy. The pandemic has also upended existing bankruptcy proceedings for a host of other companies, including EP Energy and retailers Modell’s Sporting Goods and Pier 1 Imports. 
“Sometimes the best alternative is really just the least worst,” said Vincent Indelicato, a bankruptcy attorney at Proskauer Rose. “That is a very hard thing for people to accept.”