Today on Yahoo! Finance: The coronavirus hit retailers hard, causing businesses to file for bankruptcy across the world. Peter Kaufman, Gordian Group President joins Yahoo Finance’s On The Move panel to weigh in on the differences between chapter 7 and chapter 11 bankruptcy. Peter discusses the new dynamics between lenders and borrowers and how to advantage shareholders.
00:00 | What is the difference between Chapter 7 and Chapter 11? Is one just for liquidation and other for restructuring?
01:57 | How is this different, economically from the 2008 recession. And, how many more bankruptcies could we potentially see?
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03:50 | Will small and middle market mainstreet companies benefit from bailouts? What’s the posture between lenders and borrowers today? What does each want and do they differ?
05:33 | Why would a lender help a company restructure inside or outside chapter 11 without covenants and diluting equity?
Adam Shapiro (00:05):
We’re also keeping an eye on chapter 11 and chapter seven bankruptcy. We’re going to talk about the differences and where companies go after a restructuring with Peter Kaufman. He’s the Gordian group president, head of restructuring and distressed mergers and acquisitions. It’s good to see you again. How are you doing Peter? Great. Good morning. Nice to be here. So let me start with you on this cause we created a chart that shows lots of companies have declared or sought chapter 11 protection. That’s where they can reorganize. And a few have gone with chapter seven. They are liquidating, they’re done. Explain to us not only the differences, but there are companies like pier one, which originally filed for chapter 11, but then said in the process we’re done. We’re liquidating. Does that mean they shift to chapter seven?
Peter Kaufman (00:51):
Well, I don’t want to get too in the weeds technically, but you can do chapter seven liquidation. You can have what’s called a chapter 11 liquidation. Neither of those are particularly optimal outcomes for certainly shareholders and likely creditors as well. But on the other hand, if a company is liquidating, it means they haven’t been able to attract enough capital to retool, restructure, and either sell themselves in chapter 11 or emerge. Simply put, chapter seven is the company is just gonna liquidate. It’s going to sell its lock stock barrels, inventory, and it goes out of business. And that’s it. Chapter 11 is a reorganization tool, unless it’s a liquidating 11 and a company can restructure its debts, it can sell itself. But that’s the hopeful chapter, filing is chapter 11. So a company has the chance to reorganize and emerge with a better capital structure, presumably, and a viable business plan and fresh capital to move forward and hopefully thrive.
Julie Hyman (01:57):
Hey Peter, it’s Julie here. It’s good to see you. I know that everyone is saying this time is unprecedented, but you know, you’ve been doing this for a while. So given what we’ve seen in past cycles and given some of the big names that have already filed, like Hertz, like Neiman Marcus, like J Crew, how do these cycles tend to move? In other words, how many more bankruptcies could we potentially see?
Peter Kaufman (02:21):
Yeah, that’s a great question. These cycles are all different. This is a lot different than 2008 that was really financially driven. This is consumer driven. Anything that’s consumer facing or directly or even indirectly travel, leisure stuff, gyms, trade shows, airlines, trains, car rentals everyone is under huge pressure. And you know, I was listening to your prior guests who had a lot to say that I found of interest. But just because you open an economy doesn’t mean people are gonna show up. I don’t know who’s going to be showing up at restaurants, planes, trains, et cetera. I think it’s going to be careful and slow and I think that we have a lot to play out here. Two important dates to keep in mind. June 30th, end of the second quarter, August 15th, is when companies have to report either public or private companies need to report to their lenders if they breached any covenants. And I think you’re going to see an awful lot of chapter 11 filings over the next period of time. I don’t see this cycle being cured anytime soon. I think if as in when there’s an effective vaccine, that’s clearly going to be a huge impact, but I think the bankruptcy courts I believe are going to end up being swamped over the next year or two as this thing ripples as these exontionist market conditions ripple through individual confidence.
Julie La Roche (03:50):
Hi Peter, it’s Julie La Roche. Thank you so much for joining us. I always find conversations with restructuring bankers to be pretty instructive, just given what’s going on in the broader business community and the economy. I have a question for you because I would wonder, what do you think the main street lending program might mean for restructuring in the middle market, the middle market restructuring? What kind of impact might we see there?
Peter Kaufman (04:16):
Well, you know main street and small businesses have never done well in this country even in bailout programs, they’re, they’re not doing well today. They haven’t in prior cycles. It’s rightly or wrongly, it’s the big companies, the big financial institutions that have done well. The government can prop things up in a sense, the government cannot create demand. And I think that’s what’s missing now. I think it’s what’s going to be muted going forward for a good long while. And so I think that the middle market is going to be a lot more problematic than the bigger companies. But even today, you’re seeing the bigger companies go chapter 11 to try and reorganize. There’s a great tension today and it’s true with big companies, maybe truer with middle market companies between what the lenders want today. Lenders today, once the borrowers to be on a short leash and they want the owners to put in more equity beneath their debt compared to what companies want today, which is a long runway with no convenance, with the ability to not have to worry about what the results were last month, but give themselves a good two year plus runway because no one’s smart enough to have a good crystal ball about when this ends.
Adam Shapiro (05:33):
Peter, let me interrupt you with that because that’s a great point. Why would a lender help a company, restructure inside or outside of say chapter 11 without covenants or you know, diluting shareholder equity? It seems to me as a lender, no way.
Peter Kaufman (05:50):
Well, you know, you’d say that, but that’s why you’d hire me and Gordian Group because we never represent financial creditors so we can give unconflicted advice to a board seeking to benefit shareholders in these situations. And the reason that lenders will do as I’ve just indicated is not because they’re nice people, although they may be, but because we have strategies usually bankruptcy centric that they will like a whole lot less than giving a two year runway with minimal covenants. So bankruptcy, chapter 11, is a very important tool even, or almost especially outside of court, because everyone in a tough situation, like many of these companies find themselves in view the world, the prism of what can I do to the other side in chapter 11 and what can they do to me? And so having bankruptcy centric strategies that the lenders don’t like very much almost always means you can get something done conventionally outside of chapter 11 and it’s a long winded way of saying that while you might say, and it might look that way correctly from the outside, that gosh, why would a lender do that? Give two years of runway and not dilute the shareholders? And the answer is because the lenders have seen, at least in our deals, that that’s a much better outcome for them than some of the other strategies that we can present to them.
Adam Shapiro (07:15):
In other words, one company’s protection is another’s threat. Peter Kaufman, we appreciate your being here. Gordian Group President and Head of Restructuring and Distressed M&A all the best to you.