Monthly Archives: September 2021

(Reuters) - New commercial bankruptcy filings have continued to fall throughout 2021, but experts say the favorable conditions that have allowed businesses to stave off Chapter 11 for the time being wont last forever as the consequences of questionable deals and underlying operational problems come to the fore.

Commercial bankruptcy filings exploded in 2020 but trickled off as 2021 began. Despite some predictions that new cases would pick up in the latter half of the year as a result of the COVID-19 pandemic, filings have fallen to record lows as relief efforts helped fend off, at least temporarily, severe financial woes.

The total number of new Chapter 7 and Chapter 11 bankruptcy cases filed for the 12 months ending June 30, 2021 were the lowest since 1985, according to the Administrative Office of the U.S. Courts. Commercial filings fell 17.7% to 18,511 compared with the previous year.

Even the dollar amount of this years bankruptcy filings dropped. The largest corporate bankruptcy in 2020 was Hertz Global Holdings Inc with $25.43 billion in assets when it filed, while 2021s has been offshore driller Seadrill Ltd, with $7.29 billion in assets, according to a report compiled by Cornerstone Research.

The obvious explanation for the lower number of business filings is the sustained strength of the capital markets that has made it easy to access financing. But some businesses have also enjoyed greater flexibility to make internal structural changes during the pandemic, Mayer Brown restructuring partner Lucy Kweskin said.

Companies have been able to implement under-the-radar layoffs and other cost-cutting measures that, in other environments, would have garnered bad publicity and fostered tense employee relations, Kweskin said.

Meanwhile, lenders have maintained a flexible approach to the debts theyre owed. In some cases notably those involving movie theaters, theme parks, and cruise ships, or any business that depends on large amounts of people to gather lenders are trying to avoid a situation in which they become owners of the companies that owe them money, Sullivan & Cromwell's global restructuring co-head James Bromley said.

Are creditors really interested in owning a movie theater chain at this moment? The answer is no, he said.

Instead of foreclosing, Bromley said, lenders are more likely to extend debt or seek increased collateral. But those arent long-term solutions to a companys underlying financial problems, especially in areas like the airline and auto industries, he said.

Additionally, a pattern of low yields on credit opportunities led some investors to go after riskier investments because they were the only ones that offered decent returns, Bromley said. Those questionable investments will likely turn south, Bromley added, which could lead an uptick in corporate bankruptcy filings in 2022 or 2023 as borrowers are unable to live up to the terms of their deals.

There are bad deals that are attracting a lot of money and those bad deals will go bad, Bromley said.

Retail has had an especially quiet year compared with 2020, when giants like JC Penney and Neiman Marcus sought bankruptcy protection. As of August, there were only nine notable retail bankruptcies filed during 2021, according to data collected by financial advisory firm BDO. None have had the same level of name recognition as the 2020 cases.

BDO partner David Berliner says the slowdown in retail bankruptcies is due in part to the fact they still have the upper hand over landlords, who will often agree to discounted rent if it prevents leases from getting canceled altogether.

Right now the pendulum has swung in favor of retailers in their battle with landlords, as landlords try to keep tenants from fleeing, he said.

Back-to-school and holiday shopping seasons are likely to bode well for retailers this year, especially compared with the low spending by consumers during 2020, Berliner said.

However, a retail rebound could be undermined by the higher wages necessary to bring employees back into stores and tight inventories caused by shipping delays, he added.

Additionally, he said, consumers could scale back their discretionary spending soon as a result of extra debt they took on to stay afloat over the past year.

In the end, however, companies will almost always try to solve their financial troubles outside of a bankruptcy courtroom, if only to avoid the press and public scrutiny that comes with a formal Chapter 11 filing. That will still be the case, even in a pandemic.

You may have some people say, I just cant weather this business and climate anymore, and the Delta variant pushes them to the brink and they end up selling assets, Kwestin said. But some of that may not necessarily need to be in court.

Maria Chutchian reports on corporate bankruptcies and restructurings. She can be reached at maria.chutchian@thomsonreuters.com.

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Bankruptcy filings are down, but lousy deals and operational woes will change that - Reuters

September 8, 2021

It comes to us from a July 2021 North Carolina district court decision reversing a $115,000 sanctions order by a North Carolina bankruptcy court. The story offers a lesson and a moral. The lesson is that the bankruptcy court cannot sanction a creditor if there is an objectively reasonable basis for concluding that the creditors conduct is lawful. The moral of the story is that a creditor can avoid the time, expense, and risk associated with litigating contempt and sanctions issues by taking basic steps to ensure that confirmed Chapter 11 plans are clear and precise.

In 2009, the Beckharts filed Chapter 11. At the time, they were almost a year behind on a loan secured by the property at Kure Beach. The loan servicer objected to a plan confirmation because it did not specify how post-petition mortgage payments would be applied to principal and interest. The bankruptcy court confirmed the plan without clarifying the issue, but the servicer did not ask the court to reconsider its order nor did it appeal.

The Beckharts paid for five years. Shellpoint acquired the loan from the original servicer and treated it as in default based on unpaid accrued arrearages. Periodically, Shellpoint sent default letters to the Beckharts, who disputed the default. Counsel for Shellpoint advised that the confirmation order had not changed the loan contract terms and that the loan remained in default. The matter escalated with the Beckharts filing complaints with the Consumer Financial Protection Bureau. Shellpoint commenced foreclosure, then represented to the Beckharts it was ceasing foreclosure, but then posted a foreclosure hearing notice on the Beckharts' door (allegedly due to error).

In January 2020, the Beckharts moved the bankruptcy court to find Shellpoint in contempt and award them monetary sanctions. The court held a hearing in June and, in September 2020, found Shellpoint in contempt. The court tagged Shellpoint with $115,000 in sanctions for lost wages, "loss of a fresh start," attorney's fees, and travel expenses.

Bankruptcy courts have the power to hold a party in civil contempt and to impose sanctions for violation of a confirmed plan. The test for liability is based on a recent United States Supreme Court decision -- Taggart v. Lorenzen. (To read our discussion of Taggart, click here.) The Taggart test prohibits sanctions if there was an objectively reasonable basis for concluding that the creditors conduct might be lawful.There can be contempt for violating the discharge injunction only if there is no fair ground of doubt as to whether the order barred the creditors conduct.

In reversing the bankruptcy court, the district court noted that the plan and confirmation order did not state how much the debtors would owe on confirmation, did not say how the $23,000 in arrears would be paid, and did not set the amount of the first payment. Confusingly, the confirmation order also said that the original loan terms would remain in effect, except as modified. Finally, the district court pointed out that Shellpoint was repeatedly advised by counsel that their behavior was authorized, and reliance on the advice of outside counsel is a sufficient defense to civil sanctions. Based on all these facts, the district court found that Shellpoint acted in good faith and interpreted the confirmation order in a manner consistent with the contractual terms of the loan, and that was objectively reasonable.

Creditors can take some comfort in the "no fair ground of doubt" test, which is more forgiving than a strict liability standard. Creditors can also solicit and act on the advice of counsel before engaging in perilous conduct, which provides another layer of protection. But the most important takeaway is the self-evident principle that creditors should insist on clear and specific plan terms. Shellpoint ultimately prevailed and avoided sanctions, but only after over 18 months of litigation. All of that could have been avoided had the loan servicer insisted the plan specify how the Beckharts' payments would be applied to satisfy the arrearage.

-- 2021 Ward and Smith, P.A. For further information regarding the issues described above, please contact Lance P. Martin.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

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Use Clarity to Avoid Contempt in Bankruptcy - Ward and Smith, PA

LATAM Airlines Group - and certain of its debtor-affiliates in Brazil, Chile, Colombia, Ecuador, the United States, and Peru - have received more than USD5 billion in non-binding capital and financing proposals to exit from Chapter 11 bankruptcy proceedings, according to an SEC filing.

The airline group also released its five-year business projection, which it said marked one of the final stages before the presentation of its plan of reorganisation. LATAM forecasts recovering 2019 profitability by 2024, and a 78% operational result increase by 2026 when compared to pre-pandemic figures in 2019, the company said in a statement.

The offers from its most significant claim holders and its majority shareholders contemplate raising the new funds through the issuance of new debt and equity in LATAM, which would be "backstopped by the parties making the proposal". In addition, in each exit proposal, the proponents contemplate that if such proposal is approved and implemented, it would result in the substantial dilution of LATAMs currently existing shares, according to the filing by chief executive officer Roberto Alvo on September 9, 2021.

LATAM will continue to discuss the exit proposals with their respective proponents and will continue to engage in discussions regarding its reorganisation plan with such proponents and other stakeholders, some of whom have agreed to remain under non-disclosure agreements," he said.

LATAM is focused on ensuring that any exit strategy allows it to emerge from the Chapter 11 proceeding with a robust capital structure, adequate liquidity, and the ability to execute its business plan in a sustainable manner over time. Any plan will be implemented in accordance with the relevant requirements of the US Bankruptcy Code and Chilean law, Alvo said.

An extraordinary meeting of shareholders would be called when appropriate, subject to the progress of the negotiations with the various stakeholders. The carriers largest shareholders include Delta Air Lines (DL, Atlanta Hartsfield Jackson) (20%), the Cueto Group (16.4%), and Qatar Airways (QR, Doha Hamad Int'l) (10%). Other shareholders have 34.4% ownership in LATAM.

LATAM and its subsidiaries - which entered US Chapter 11 bankruptcy protection on May 26, 2020 - have also filed a motion with the Bankruptcy Court for the Southern District of New York for an extension until October 15 for the period during which debtors have the exclusive right to submit a plan of reorganisation, and until December 15 to solicit acceptances of a plan. The court is scheduled to consider the motion at a hearing on September 23, 2021.

As of July 31, 2021, LATAM reported about USD1.9 billion in liquidity, considering USD1.1 billion in cash and cash equivalents and USD800 million in undrawn Debtor-in Possession (DIP) financing.

LATAMs existing debtor-in-possession financing provides for a possible additional third tranche (the Tranche B Facility) of secured financing up to USD750 million, in addition to the existing USD1.3 billion Tranche A facility and the USD1.15 billion Tranche C facility, which are not fully drawn as of this time. Given the currently favourable market conditions, LATAM was soliciting interest from potential lenders in providing a Tranche B Facility and would consider proposals to determine whether it was able to borrow funds at a more competitive rate than under the existing Tranche A and C facilities.

Meanwhile, a telephonic hearing will be held in the US Bankruptcy Court on October 28, 2021, on a motion filed by the debtors to assume various aircraft agreements and for related relief totalling about USD52.4 million according to a notice filed by the court on September 10, 2021.

Alongside the news of its proposed exit funding, LATAM also disclosed its financial projections coming out of Chapter 11 until 2024 by when it expects to fly a similar amount of Available Seat Miles (ASKs) as it did in 2019 and a growth of 7% by 2026, resulting from an estimated recovery of the domestic markets by 2022 and the international ones by 2024. However, its mix of operations would be very different. "The stage length will be shortened as domestic markets recover faster than international, and we will be carrying 12% more passengers with a lower corporate passenger mix compared to pre-pandemic," the airline said.

The recovery scenario was supported by LATAM Airlines Brazils domestic markets operational ramp-up to date, which reached a 77% ASKs in August, compared to 2019, and was forecast to surpass 100% of 2019 levels at the beginning of 2022. The domestic markets of the affiliates in Colombia (LATAM Airlines Colombia), Ecuador (LATAM Airlines Ecuador), Peru (LATAM Airlines Per), and Chile (LATAM Airlines) already reached 72% in August, while the international recovery of the group, both regional and long-haul, continued to be affected by travel restrictions.

Meanwhile, LATAM had simplified its fleet and was now operating an all Boeing wide-body fleet, creating additional efficiencies. We will be flying newly retrofitted B777s from Brazil and in the coming months, we will be introducing the B787-9 in Brazil. We are also continuing to retrofit the cabins of our narrow-body fleet. According to the ch-aviation fleets advanced ch-aviation module, the airline group has a fleet of 294 aircraft spread across its various AOCs including forty-four A319-100s, 132 A320-200s, twelve A320-200Ns, forty-eight A321-200s, twenty-four B767-300(ER)s, ten B777-300(ER)s, ten B787-8s, and fourteen B787-9s.

Cost reduction initiatives addressed during the Chapter 11 process, including leveraging LATAMs digital transformation to improve efficiency, supplier renegotiations, and fleet restructuring, saved USD900 million annually and allowed LATAM to structurally change its cost base. It said an important part of its cost containment was coming from the renegotiation of its fleet, which represented its largest fixed cost. Fleet costs alone note annual cash cost savings of over 40% compared to 2019. "We have already obtained court approval for all the new terms regarding 95% of our fleet. These new terms will allow us to reduce the fleet-related cash outflows by over 40% in the forecasted period when compared to 2019. We have also entered into interest-only or variable payments depending on utilisation, extending to 2022 for 60% of our narrow-body fleet and to 2023 for 50% of our wide-body fleet. Its MRO facilities in Brazil and Chile would allow it in-source most of its maintenance.

LATAM Group said it had secured slots for converting passenger aircraft into freighters, allowing it to increase cargo capacity by 80% by 2024. "This heavier cost structure (larger cargo operations, more frequencies, shorter stage-length, more passengers) and the five-year inflationary pressure will all be offset by cost-saving initiatives. By 2024, before inflation, we expect our total Cost of Available Seat Kilometre (CASK) ex-fuel to amount to 3.9 cents, representing a 0.6 cent improvement on the 2019 CASK ex-fuel."

LATAM expects its revenues to increase by 13% to USD11.8 billion in 2026 and its EBIT margin to reach 25% in the same year. Passenger revenues were expected to grow 8% and cargo revenues by 59% compared to 2019.

The cargo affiliates of LATAM would incorporate at least eight new freighters into their fleet and some of these aircraft conversions had already started. The slower recovery in the international business provides for a unique opportunity for this business unit as there was less belly capacity available.

On the passenger front, the Group foresaw a competitive environment during the initial years of projections. "We expect the capacity of the group to exceed the demand and the unbundling of our fares and the improved cost structure will play a key role. In the later years of the projections, we are forecasting a morebalanced supply and demand." LATAM unbundled its fares in 2017, implementing an ancillary products strategy, which it said, would be a pillar of future growth.

Operating cash flow was forecast at USD1 billion in 2022, increasing to USD2.8 billion in 2026. Free cash flow, including fleet CAPEX, would be positive in 2023 and ramp-up to USD 1 billion in 2026. "All additional aircraft are modelled as operating leases and therefore will not imply a cash-out," it noted.

In addition to fleet and cargo conversions, LATAM would be investing in improving its performance and product, including digitalisation, cabins, and Wi-Fi connectivity.

The Group said it had leveraged the Chapter 11 process and would exit it with an improved operational cost structure that would position it competitively."The reorganisation has allowed LATAM to introduce structural transformations: renegotiated fleet, further improved an already competitive cost position and a strengthened network. We are convinced that LATAM Group will come out of this crisis stronger than ever," it said.

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LATAM garners over $5bn in bankruptcy exit financing offers - ch-aviation

All is not well with the Insolvency and Bankruptcy Code (IBC), on that there is agreement, across Parliaments Standing Committee, promoters and sundry commentators. How can it be fixed?

The problems range from voluntary bankruptcy not working as it should to unaccountable and unethical resolution professionals (RPs) and the absence of a deep and broad enough market for corporate debt. These must all be addressed.

Turn a New Chapter

The equivalent provision in the Indian code should be a financially stressed company voluntarily filing for bankruptcy. But this has not caught on. Under Section 10 of IBC, a corporate debtor can file for bankruptcy after committing debt-servicing default, and has to indicate an RP to run the company. These provisions should be changed. Voluntary filing of bankruptcy should be a pre-emptive move, seeking respite from debt servicing while a turnaround is put in place. The stipulation of filing for bankruptcy only after default should be removed. The incumbent management should be allowed to implement the turnaround, with the approval of the turnaround scheme, complete with monthly milestones, failure to achieve which should be reason enough for voluntary bankruptcy to lapse.

RPs are another source of angst. It would be unfair to tar the entire flock based on some black sheep who prepare unscheduled bags of wool, one for the master, one for the dame, and one for their own little ewes who live down the lane. However, the institutional framework to keep their conduct proper is missing.

RPs are governed by codes of conduct, one of the Insolvency and Bankruptcy Board of India (IBBI), and another of their affiliating institute. The only code Indians instinctively follow is that of caste honour, which leads on to the killing of young couples who love according to biology rather than sociology. There must be rigorous concurrent audit of the conduct of RPs. The IBBI must be beefed up to monitor this activity.

Employees of a company going bankrupt are as much victims of management failure/misconduct as creditors. Their help could be invoked to determine the value of the assets of a company. In the original scheme of things, information depositories were supposed to come up that would contain all the relevant data on companies. This has not materialised.

How much the assets of a company are worth is often vague, and there is little to prevent company managements or RPs from siphoning value out of a company. It might be a good idea to put in place an institutional framework for creating an inventory of a companys assets involving employees. Whistleblowers must be protected and rewarded.Liquidation Value No SecretIn a recent insolvency proceeding, a bench of the National Company Law Tribunal (NCLT) wondered if there had been collusion between the RP and the bidder who put in a bid just above the liquidation value of the company. This might have been unfair. If the companys books were reasonably accurate, due diligence would reveal the liquidation value to anyone.

In any case, why should the liquidation value be a secret? It should be a piece of information available to all bidders. If there is sufficient competition among would-be buyers, transparency on liquidation value would not bias bids to converge towards that figure. That brings us to the central defect in the working of IBC: insufficient competition among would-be buyers of resolved assets, either as going concerns or as liquidated parts.

Even without collusion among would-be buyers, there might be a paucity of very many viable bidders for a company going under the hammer during the 180-day interval in which resolution is supposed to take place. The way out of this time constraint is to sell the asset to patient capital that can, one, pay a competitive price for the asset, two, hold on to the company till a decent buyer comes along, and, three, run it competently in the meantime, if necessary.

The asset reconstruction companies (ARCs) created under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act of 2002 are not up to the task. They do not have capital, they are supposed to pay banks only 15% of the deal price in cash, the rest is in the form of Security Receipts, essentially IOUs that can, in theory, be traded on the market but are not. And, ARCs do not have the managerial bandwidth to run the companies they buy until they find a buyers for those companies. Only private equity does this kind of a thing.

Recently, ARCs sought the governments help to obtain bank credit. ARCs should be issuing bonds to raise the money they need but, for that, we need a market for subprime bonds. And they should be able to raise enough from sale of subprime bonds to pay off the full value of what they are willing to pay for the resolved assets. That is the only way ARCs would cease to be vehicles for banks to evergreen their bad loans instead of bad loans, banks hold IOUs from ARCs.

The ARCs must be recast, entirely, as companies, without being attached to the RBIs apron strings.

Views expressed are author's own

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All is not well with India's bankruptcy law. Here's how it can be fixed - Economic Times

Healthcare and pharmaceutical giant Johnson & Johnson has been dealing with accusations about its baby powder for decades, andinvestigationshave revealed that the company knew that its signature product contained asbestos. They were sued in 1997, and J&J denied the allegations, even though internal documents from the 1970s revealed the presence of asbestos in its baby powder.

Now, more than 34,000 lawsuits are alleging that the asbestos in the talc in baby powder has contributed to cancer in patients all over the country, including women connecting the use of the powder to ovarian cancer. The product is no longer sold in the US and Canada.

But J&J explored a plan to use a Texas law to deflect the blame and financial punishment to another company, Reuters reports. The move is called the Texas Two-Step. It works like this: A company with liabilities, like J&J and the asbestos suits, transforms into a Texas entity, and then the new company undertakes a divisive merger that splits that company into two companies, which is allowed under Texas divisive merger statute. Then, liabilities and assets can be split, protecting the money and letting the other company take on the liabilities. Though this would typically be a fraudulent transfer, Texas law makes it legal.

The company taking on the liabilities next files for bankruptcy, and the other company is released from all claims against it. During settlement discussions, J&J lawyers mentioned that the company was considering the move. There wouldnt have been anything plaintiffs could have done to stop it. The potential payment could be $24 billion, and the move would limit compensation to pennies on the dollar and could end all trials in state courts across the nation. The parent company would not have any of the stigma attached to filing bankruptcy, says Andy Birchfield, Mass Tort Section Head of the Beasley Allen law firm, which represents thousands of ovarian cancer victims. It would just be the new company that is formed, and there would be a limited pool of assets in that new company that would be available to the victims that are now creditors.

In September, the plaintiffs sought a temporary restraining order and preliminary injunction to prevent J&J or any corporate affiliates from transferring its assets to a subsidiary. Plaintiffs deserve to have their day in court before a judge and jury, not arbitrarily placed in bankruptcy court with little hope of adequate compensation, Birchfield said via release. Bankruptcy should not be used as a ploy to delay or deny justice for the victims of a dangerous product produced by a company with hundreds of billions of dollars in assets.

The financial implications could be massive as well. One suit with only 22 claimants resulted in an award of $2.12 billion already, which was reduced from an initial jury award of $4.69 billion. With tens of thousands of claimants on the latest suits, the results could be astronomical. It is unlikely to be successful, and J&J hasnt made any moves yet, but Birchfield says plaintiffs wont know in advance, tying up the plaintiffs in bankruptcy filings rather than giving them their day in court. It would be atrocious for our clients and cancer victims, Birchfield says. They would be further victimized by Johnson & Johnson by taking this bankruptcy process and using it to their advantage, and extreme disadvantage for their former customers and our clients.

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The Texas Two-Step and How Corporations May Use it to Avoid Bankruptcy - D Healthcare Daily