Bankruptcy Paradigm Evolving in Response to Pandemic-Related Shutdown
March 25, 2020
The COVID-19 pandemic affects almost every aspect of life and business in the U.S., and distressed companies seeking to restructure are no exception. Debtor entities that had developed clear paths to a bankruptcy exit have seen the ground shift below their feet, leaving prior plans in shambles. Debtors have gone so far as to make unprecedented requests for temporary suspension of their bankruptcy cases. Prospective purchasers and lenders have been reconsidering their interest in investment, leaving some debtors grasping for creative solutions in an uncertain future. At the same time, those looking to stave off a bankruptcy filing have seen out-of-court exchanges fall apart. The impacts of the pandemic described below highlight the new reality that distressed entities and restructuring professionals will face myriad novel challenges in the coming months.
- CraftWorks Holdings (which filed for bankruptcy earlier this month) has been forced to close all of its 261 restaurant locations. Accordingly, to limit administrative expense burn and salvage its ability to obtain future financing, the company asked the U.S. Bankruptcy Court for the District of Delaware to allow the mothballing of the typical court procedures while their restaurants did the same. Specifically, the debtors proposed that creditors confer with them before filing any pleadings and, if the matter could not be resolved consensually, the parties use a streamlined process to seek court intervention. The proposed procedures would have remained in place for thirty days, with an option to extend an additional thirty days. However, on March 23, the court opined that it was not inclined to grant such relief, explaining that, under the proposal, “the burden imposed on creditors who are simply seeking to vindicate their rights is too great.” Nonetheless, the court praised the debtors’ creativity and “strongly encourage[d] the parties to develop and propose procedures that could govern the prompt approval of business resolutions . . . without need for protracted motion practice,” which may include, “stipulations for relief from stay or rejection of leases, etc. under certification of counsel reflecting consent by core stakeholders and affected parties.”
- Modell’s Sporting Goods filed a motion on March 23 seeking a temporary suspension of all deadlines and activities in their chapter 11 cases for a period of up to sixty days, without prejudice to their right to seek additional time. The debtors stated that the cornerstone of their bankruptcy process was the liquidation of 134 stores and e-commerce site, which is not possible in light of COVID-19 restrictions. This has left the debtors with no choice but to mothball their operations to preserve value, with a hope to recommence the liquidation in the near future.
- On March 23, the bankruptcy court overseeing the restructuring of Sanchez Energy Corporation held an emergency status conference for the debtors to discuss various alternatives with respect to DIP financing to combat these “unprecedented times.” At the conference, the debtors suggested they were prepared for the possibility of “an impaired DIP facility” and exploring alternative options with DIP lenders. The parties had previously agreed to extend benchmarks for the filing of a plan and disclosure statement; however, they could not come to terms to meet the extended deadline or agree on another extension.
- That same day, the U.S. Bankruptcy Court for the Southern District of Texas vacated a previously-entered confirmation order in EP Energy. The court also approved an amended form of the stipulation between the EP Energy debtors and the noteholders providing for consensual termination of the noteholders’ commitments and agreements to support the plan and backstop certain new money rights offerings in connection therewith. Furthermore, the court approved an amendment to the final DIP order, which provided that the debtors will no longer be required to make interest payments on certain lien notes.
- Debtors outside the E&P sector were not immune from the economic fallout caused by the pandemic. In an effort to keep support for its reorganization plan intact, the Puerto Rico oversight board filed a motion to adjourn consideration of the proposed plan’s disclosure statement hearing set for early June. The motion, which calls for a status report next month regarding a revised hearing schedule, notes that “[a] pragmatic approach to scheduling takes multiple interests into account and allows the Title III cases to remain ‘on track.'” Meanwhile, the oversight board had to shift its focus from reorganization to reaction, engaging in discussions with the Puerto Rico Government that recently culminated in the authorization of $787 million “to fight the COVID-19 emergency.” This newly-authorized spending includes $500 payments to nearly 170,000 self-employed individuals.
- In another vulnerable sector, Mallinckrodt plc, a healthcare/pharmaceutical company in a self-described “crisis mode,” has moved for reconsideration or a stay of a recent summary judgment decision issued by a U.S. District Court for the District of Columbia that exposes it to “over $1.2 billion in liabilities due almost immediately” at the same time that it is re-negotiating a possible settlement in separate proceedings. Absent relief, Mallinckrodt argues that patients could be deprived of life-saving medication, including “a drug that is being tested as a possible therapy for treatment of COVID-19.” The crisis has also frustrated Mallinckrodt’s efforts to amend a credit agreement with lenders or obtain new term loans, which prevents Mallinckrodt from implementing a settlement of opioid litigation with broad creditor support. As such, the company is working to “engage in discussions with certain debt holders of the Company regarding potential refinancing alternatives.”
- Earlier this year, Hornbeck Offshore Services Inc. commenced private offers to exchange certain outstanding senior unsecured notes for newly-issued notes or cash consideration. However, the company was recently forced to terminate the offers because it was unable to satisfy minimum participation terms. Hornbeck cited “the advent of circumstances surrounding COVID-19 and the precipitous decline in oil prices,” which “has had a negative effect on the offshore service vessel industry, generally, as well as on the Company.” Hornbeck, which is operating under forbearance agreements with its lenders until March 31, is now exploring “a range of options with its stakeholders with the common objective of strengthening the Company’s financial position.”
- California Resources Corporation recently terminated its private exchange and subscription offers with lenders that were announced in February. The company reasoned that recent developments in the financial markets “render the offers inadvisable and impractical.” Instead, the company will “pursue other alternatives, which could include a similar but modified exchange, to . . . protect the value of its business during this market dislocation.”
Clearly the COVID-19 pandemic, and the resulting economic shutdown, is unprecedented. The situation has evolved at lightning pace, and will likely continue to do so. Restructuring professionals, and the creditor constituencies they represent, will need to be nimble and craft creative solutions to new problems in the months ahead to maximize the value for all and minimize the damage to the economy at large. Seward & Kissel’s Corporate Restructuring & Bankruptcy Group will continue to closely monitor the situation, and remain accessible to clients seeking to emerge from this crisis. If you have questions related to any distressed scenario, please don’t hesitate to reach out to the attorneys listed below, or your primary contact at S&K.joh
Seward & Kissel has established a COVID-19 Resource Center on our web site to access all relevant alerts that we distribute.