McIntire Virginia Bankers Association Professor David C. Smith lent his financial expertise to a group letter sent to Congress on July 10 addressing the availability of federal financing for companies reorganizing under Chapter 11.
As part of the Bankruptcy and COVID-19 Working Group, an interdisciplinary team of scholars analyzing the effects of COVID-19 on large U.S. businesses, Smith and 34 other experts are monitoring bankruptcies during the pandemic and offering recommendations to Congress based on their findings. One key area analyzed by the group concerns whether the federal government should back the market for financing bankrupt companies through what is known as debtor-in-possession (DIP) loans.
Spurred by concerns about the timetable for economic recovery and its effects on employment nationwide, the group focused on the pandemic’s potential for disrupting Chapter 11 DIP financing.
In its letter, the working group provided three recommendations—that the federal government provide no additional support for DIP loans to large companies filing for bankruptcy, that it revise the CARES Act to allow lending to flow to smaller Chapter 11 companies, and that it direct any federal lending programs for bankrupt firms to small- and medium-sized businesses rather than large firms:
“First, based on our analysis of recent and historic data, we believe that there is sufficient liquidity in the private sector to provide for the financing of large corporate bankruptcies, and that there is no present need for an additional federal lending facility targeted at large companies that file for Chapter 11.” The group also suggested that “scarce federal resources would be better focused elsewhere” during the pandemic.
“Second, as a matter of principle, we believe that federal lending facilities should be available to Chapter 11 debtors on the same conditions and terms as any other firm. Accordingly, we urge you to revise the existing CARES Act facilities and ensure that future lending facilities do not discriminate against Chapter 11 firms.” As the group took the position that viable firms responding to COVID-19 restructuring operations in bankruptcy court are equally worthy of federal support as viable firms restructuring outside of bankruptcy, it stated that companies should not be put in the position of choosing between Chapter 11 and access to federal funds.
“Third, while larger bankrupt corporations appear to have sufficient liquidity to accomplish a successful reorganization as things stand today, we believe that federal lending programs could play an important role in supporting the financing market for smaller corporations that seek to reorganize in Chapter 11.” Because of the difficulties smaller firms face in obtaining funds when dealing with typical banks inexperienced in DIP financing, the group believes that government backing could potentially safeguard those companies from liquidation, while also saving as well.
“At the outset of the pandemic, several academics and journalists advocated for large federal government intervention in DIP markets, believing that the markets would shut down in the face of large COVID-related bankruptcy filings,” Smith said. “But our committee’s analysis showed that the DIP market for large companies has functioned well without government involvement. At the same time, current government lending programs meant for smaller firms preclude loans going to bankrupt firms. Our view is that existing lending programs such as the Paycheck Protection Program (PPP) and Main Street Lending Program should not discriminate against firms restructuring in Chapter 11.”
The COVID-19 Working Group’s recommendations, as they relate to financing for large corporations, reflect the same line of thinking promoted in Smith’s June 15 Real Clear Markets op-ed piece, co-written with Elliot Ganz, General Counsel and Co-Head of Public Policy at the Loan Syndications and Trading Association (LSTA).
