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Speaker 1: This is Bloomberg Law with June Grasso. As the pandemics

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Speaker 1: pause in business threatened to put millions of Americans out

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Speaker 1: of work and leaves companies across a range of industries

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Speaker 1: wondering how they'll even make payroll. Bankruptcy lawyers phones are

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Speaker 1: ringing off the hook. Joining me is leading bankruptcy expert

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Speaker 1: Edward Morrison, Professor at Columbia Law School. Many bankruptcy lawyers

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Speaker 1: are seeing an almost unprecedented number of calls from businesses

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Speaker 1: large and small. Are many of them panicking too soon?

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Speaker 1: I don't think so. I think that the urgency of

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Speaker 1: action and Congress is indicative of the crisis that many businesses,

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Speaker 1: consumers too, are suffering right now. I mean, the social

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Speaker 1: distancing has led to a plummet and and revenues earned

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Speaker 1: by businesses and income earned by consumers, and that shortfall

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Speaker 1: is creating financial distress for those who can't pay their

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Speaker 1: debts as they come do. And even if this is

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Speaker 1: a temporary problem in the sense that our economy might rebound,

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Speaker 1: it's still a problem with great urgency right now. Is

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Speaker 1: it hard for businesses to project whether they'll need to

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Speaker 1: file for bankruptcy when the situation is so open ended,

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Speaker 1: and the unknowns outweigh the knowns. Yes, I think that

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Speaker 1: the post coronavirus environment is really hard to predict right now.

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Speaker 1: We'd love to imagine that the economy will rebound like

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Speaker 1: a rubber band after this pandemic is resolved, but there's

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Speaker 1: a lot of uncertainty about how quickly the economy can rebound,

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Speaker 1: especially if many businesses die during this period. It will

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Speaker 1: take time for them to be reborn. And the businesses

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Speaker 1: that die are businesses that no longer employ workers, and

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Speaker 1: those workers no longer have the kind of income that

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Speaker 1: they had before and longer spending like they did before.

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Speaker 1: So one of the great uncertainties is how long it'll

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Speaker 1: take for businesses to rebound. That depends a lot on

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Speaker 1: how long it takes for workers to become reemployed, to

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Speaker 1: get their incomes back up to consume again. So I

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Speaker 1: think there's a lot of uncertainty for many businesses, and

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Speaker 1: that's particularly problematic. I think for firms that have lots

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Speaker 1: of debt right now, that these are the kinds of

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Speaker 1: firms that bankruptcy was meant to help. Bankruptcy is a

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Speaker 1: solution for firms that have debts that cannot be paid

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Speaker 1: as they come do, But bankruptcy is typically used by

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Speaker 1: firms that have debt that just can't be repaid any time,

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Speaker 1: at least unlikely to be paid in the long term.

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Speaker 1: Very frequently find firms in bankruptcy that are insolvent in

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Speaker 1: the sense that the debt exceeds the value their assets,

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Speaker 1: and that's thought to be a permanent condition, and therefore

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Speaker 1: bankruptcy is used to bring those debts down to a

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Speaker 1: level consistent with the company's ability to pay. For many

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Speaker 1: businesses during this current crisis, they may be temporarily unable

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Speaker 1: to pay those debts as they come do, but in

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Speaker 1: the long term, there's a lot of reason to think

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Speaker 1: that if the economy returns sooner than later, they're going

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Speaker 1: to re generate themselves, start earning income and be able

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Speaker 1: to pay those debts as they come do. So it's

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Speaker 1: a difficult time for companies that have in some sense

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Speaker 1: are going through an emergency condition right now. It's not

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Speaker 1: a permanent insolvency, and sometimes it's a temporary insolvency, and

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Speaker 1: that's a bit of an unusual condition for many firms

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Speaker 1: thinking about bankruptcy. One lawyer said, distress situations are ramping

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Speaker 1: up more quickly now than they did in two thousand eight.

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Speaker 1: Do you see a comparison to two thousand and eight

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Speaker 1: with this situation or is it different? I think it's

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Speaker 1: very different. I think that the two thousand eight is

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Speaker 1: typically described as a two thousand eight financial crisis, and

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Speaker 1: I think the adjective financial tells us a lot. It's

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Speaker 1: a crisis that primarily began in the financial sector. The

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Speaker 1: poster child of that era as Lehman Brothers. So you

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Speaker 1: had financial institutions hemorrhaging and those failures. What we worried

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Speaker 1: about was the reverberation of those failures through the economy,

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Speaker 1: and were worried that the financial conditions of the banks

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Speaker 1: could infect main Street and make lending difficult, to make

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Speaker 1: it harder for small businesses to run. And a lot

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Speaker 1: of the effort was to stem the infection and prevent

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Speaker 1: it from spilling over from the financial sector to main street.

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Speaker 1: This is a crisis that's beginning on main Street, and

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Speaker 1: in fact, you see a lot of the effort is

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Speaker 1: preparing the financial sector for the aftershocks, because what we're

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Speaker 1: seeing first is a decline and incomes of consumers, a

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Speaker 1: decline of sales at businesses. This leads to an inability

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Speaker 1: to pay debts as they come do. This means that

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Speaker 1: banks are not getting their debts paid as they come do. So.

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Speaker 1: I think it's a very different kind of crisis and

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Speaker 1: it calls for a different set of policy responses. If anything,

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Speaker 1: if there's anything that is a connection between the two crises,

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Speaker 1: is is learning. I think that what we're seeing today

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Speaker 1: is a incredibly rapid response by the Federal Reserve, by Congress.

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Speaker 1: And when I say incredibly rapid, it's relative to what

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Speaker 1: we saw in the pre of this crisis in two

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Speaker 1: thousand eight. It took a long time for the federal

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Speaker 1: government to kind of figure out what's the right game plan.

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Speaker 1: Policies kind of came and went, Policies were tried or

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Speaker 1: turned out to be unsuccessful. There's a readjustment. I think

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Speaker 1: what we're seeing now is that within weeks we see

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Speaker 1: this incredibly rapid move by regulators, by legislators to try

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Speaker 1: to address this crisis. And I think if one thing

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Speaker 1: we might take away is that the two eight crisis

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Speaker 1: wasn't so long ago, and we built a boat a

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Speaker 1: lot of learning from that experience. That's prepared us better

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Speaker 1: for dealing with this crisis, even if the policy responses

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Speaker 1: are different. I've been talking to Edward Morrison, a professor

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Speaker 1: at Columbia Law School, about bankruptcies in the face of

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Speaker 1: the pandemics pause and business. For some businesses in the

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Speaker 1: hardest hit sectors. Is reorganization even going to be possible.

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Speaker 1: Let's say you own a chain of hotels. Can you

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Speaker 1: really sell off some hotels or assets to reorganize at

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Speaker 1: this time? Well, I think that there are many ways

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Speaker 1: to conduct a bankruptcy, and the bankruptcy doesn't necessarily require

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Speaker 1: selling off assets. It's true that many bankruptcies do. Many

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Speaker 1: firms enter bankruptcy and slim themselves, but these are typically

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Speaker 1: firms that have overexpanded, taken on too much debt, open

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Speaker 1: too many UM outlets, too many hotels, and realizing that

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Speaker 1: they need to um reduce their scale, go back to

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Speaker 1: their core competencies and become a smaller, leaner, more efficient business.

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Speaker 1: That's one type of bankruptcy, but there are many other

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Speaker 1: kinds of bankruptcies. You can envision bankruscies in Chapter eleven

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Speaker 1: is the style of bankruptcy most corporations using. It's incredibly

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Speaker 1: flexible and adaptable. Another kind of bankruptcy is one that

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Speaker 1: doesn't involve any asset sales. It could be a bit

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Speaker 1: A firm that enters bankruptcy uses bankruptcy as a holding

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Speaker 1: station to help weather the storm. And during this holding station,

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Speaker 1: the firms directors can negotiate with the creditors and negotiate

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Speaker 1: for sent for example, for forbearance to extend the maturity

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Speaker 1: of dates of the loans. Any kind of deal can

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Speaker 1: be structured. The virtue of of Chapter eleven is it's

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Speaker 1: a device that brings everybody together in one place to

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Speaker 1: negotiate simultaneously with each other over the future of the business.

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Speaker 1: And so you can have a business that enters bankruptcy

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Speaker 1: and comes out looking pretty much the same to consumers.

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Speaker 1: Look at the airlines. United Airlines went in, went out.

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Speaker 1: For many consumers, it wasn't a recognizably different company. General

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Speaker 1: Motors went in, came out still selling silverados. And so

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Speaker 1: I think that that though many companies may be in

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Speaker 1: a position where it's very difficult to liquidate their assets

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Speaker 1: in the current environment, Chapter eleven doesn't require that to happen.

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Speaker 1: Chapter eleven just requires that that the firm and its

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Speaker 1: creditors reach a deal that's in the mutual interest of everybody,

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Speaker 1: and that that deal that can be structured, maybe one

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Speaker 1: that says that creditors will give the firm more time

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Speaker 1: allow the firm to recover. On that point, though, will

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Speaker 1: there be problems inducing a bankruptcy lander to make a

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Speaker 1: loan in these times? Yes, you put your finger on

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Speaker 1: I think one of the most difficult features of the

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Speaker 1: current environments. And one way to sort of make clear

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Speaker 1: how critical it is is that you began pointing out

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Speaker 1: that we're in an environment where asset values have fallen.

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Speaker 1: Hotel might enter bankruptcy and find very few or no

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Speaker 1: buyers for its assets. But that kind of world make

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Speaker 1: no one happy. Creditors don't like that, the firm doesn't

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Speaker 1: like that, the shareholders don't like that. No creditor wants

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Speaker 1: to be in a bankruptcy where I'm getting paid very

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Speaker 1: little because we're selling assets at fire sale prices. Nobody

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Speaker 1: wants that. Everybody would prefer a reorganization of this company

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Speaker 1: that keeps all the assets together to weather the storm.

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Speaker 1: That's possible. Chapter eleven flexible, Well, what Chapter eleven requires

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Speaker 1: is blood flow and cash is the blood flow it

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Speaker 1: keeps the process alive. To have a bankruptcy process, you

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Speaker 1: have to have the cash that allows for you to

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Speaker 1: pay professional fees, your workers, keep the firm alive. Most

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Speaker 1: firms are entering bankruptcy too because of a cash crunch.

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Speaker 1: Their typical view of a firm and bankruptcy is that

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Speaker 1: it's insolvent, and most people think that's the problem that

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Speaker 1: that it is bringing the firm into bankruptcy is because

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Speaker 1: it's debt succeed its assets. Actually, the real problem that's

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Speaker 1: typically triggering the bankruptcy filing is an absence of cash,

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Speaker 1: which is the blood flow of the business. So the

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Speaker 1: firm is entering bankruptcy, it wants to reorganize itself, but

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Speaker 1: it needs cash and needs new loans. How's it going

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Speaker 1: to get that? And, as you point out, in the

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Speaker 1: current environment where banks are reluctant to extend loans, can

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Speaker 1: be very difficult. But I think that's during a crisis,

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Speaker 1: that's a problem that the government can help with. We've

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Speaker 1: seen it before that the government can be a supplier

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Speaker 1: of liquidity during a crisis, as it was for firms

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Speaker 1: like General Motors and Chrysler during the previous crisis. We

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Speaker 1: began by talking about how the last crisis was different

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Speaker 1: because it began in the fan merely begin in the

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Speaker 1: financial sector. That's true, but at the same time, it

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Speaker 1: was an environment where banks were unwilling to lend. There

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Speaker 1: was a sort of a freezing up of credit, and

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Speaker 1: we saw a collapse. We saw some of the infection

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Speaker 1: of the financial markets did into the real economy. We

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Speaker 1: saw automakers like Chrysler and General Motors suffer. Those firms

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Speaker 1: went into bankruptcy. They needed liquidity, and the government stepped in.

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Speaker 1: I think that is a fundamental role of the government

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Speaker 1: during a crisis, is to provide liquidity, and in fact,

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Speaker 1: that is what the government is doing right now, but

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Speaker 1: not doing it through the bankruptcy process, and I think

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Speaker 1: that's a missed opportunity right now. Under the Cares Act,

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Speaker 1: for example, Congress has authorized the Treasury to make loans

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Speaker 1: outside of bankruptcy to provide financing, for example, to their

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Speaker 1: airline sector. I think there's a lot of reasons to

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Speaker 1: debate whether it makes sense to for the government to

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Speaker 1: be offering direct loans to firms outside of bankruptcy. I

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Speaker 1: think there's a lot to be said for a policy

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Speaker 1: that would make loans inside of bankruptcy. The virtue of

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Speaker 1: making loans inside of bankruptcy is two fold. One, it

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Speaker 1: solves a liquidity crisis that many of these firms are

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Speaker 1: facing right now, a liquidity crisis that is made doubly

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Speaker 1: difficult by the fact that it's hard to get loans

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Speaker 1: from banks. Okay. The another advantage of making the loans

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Speaker 1: through bankruptcy is that it that loans in bankruptcy are

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Speaker 1: ones that are done in the context of a reorganization

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Speaker 1: process that forces all the investors to share the pain,

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Speaker 1: so to speak. That in a reorganization that you you

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Speaker 1: may be in a situation where shareholders will have to

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Speaker 1: have their shares canceled because the firm to reorganize it

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Speaker 1: it must convert some of its debt to equity. Okay,

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Speaker 1: that's a that's very often the shareholders are wiped out

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Speaker 1: in bankruptcy. And so what that means is that the

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Speaker 1: bankruptcy process is one where the financial stress suffered by

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Speaker 1: the firm is borne by the investors who brought that

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Speaker 1: firm to life, the shareholders, the creditors. They bring the

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Speaker 1: firm into bankruptcy, they suffer losses, they suffer haircuts, as

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Speaker 1: the as the firm's future is renegotiated, the government can

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Speaker 1: come into that process and offer liquidity, but nonetheless a

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Speaker 1: lot of the losses will still be borne by the

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Speaker 1: investors who brought it to life. Loans under the Cares

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Speaker 1: Act are made directly to airlines other industries in it

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Speaker 1: without requiring there to be a simultaneous bankruptcy filing. So

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Speaker 1: these are loans where there's the loss that the loss

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Speaker 1: is being suffered by the airlines is now being shared

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Speaker 1: by the taxpayers using public moneys, and so shareholders are

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Speaker 1: not suffering the kind of loss that they would suffer

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Speaker 1: in bankruptcy. Creditors too so the so in some sense,

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Speaker 1: loans outside of bankruptcy, such as those loans being made

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Speaker 1: pursued into the Cares Act, our loans that allow shareholders

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Speaker 1: and creditors to avoid some of the losses they would

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Speaker 1: suffer in bankruptcy. My view is that it's that having

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Speaker 1: those investors bear those losses in bankruptcies is better for

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Speaker 1: the public, because it's better, i think, to live in

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Speaker 1: a world where investors enjoy all the upsides of of

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Speaker 1: profitable operations but also bear some and a meaningful part

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Speaker 1: of the downsides of failure, even if that failure occurs

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Speaker 1: during a during a crisis, the kind of prepackaged bankruptcies

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Speaker 1: where companies spend months negotiating with creditors and restructuring their

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Speaker 1: finances before they go to court, are we likely to

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Speaker 1: see less of those in this environment. Well, it's hard

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Speaker 1: to know. I think. On one hand, you could say

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Speaker 1: that we might see fewer pre packs because they take

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Speaker 1: time to negotiate, and time is of the essence now

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Speaker 1: for many companies, and therefore there may not be time

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Speaker 1: to have as many prepackaged cases. On the other hand,

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Speaker 1: UM shareholder as UM, I mean the creditors of a company,

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Speaker 1: the directors of a company. They have strong incentives to

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Speaker 1: try to make the bankruptcy process as smooth as possible,

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Speaker 1: as quick as possible, so that it does the least

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Speaker 1: damage to the affirms operations, to its reputation UM and

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Speaker 1: requires the least financing during the bankruptcy process. So you

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Speaker 1: could imagine that there may be I think, strong incentives

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Speaker 1: to organize a pre pack UM. I think that also

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Speaker 1: a great virtue of a pre pack is that it

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Speaker 1: can be done in a way that avoids the risk

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Speaker 1: of fire sales of assets. I mean, the nightmare scenario

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Speaker 1: is that a firm enters bankruptcy and some creditors push

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Speaker 1: for the sale of assets, even at depressed prices in

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Speaker 1: the current environment. That's a nightmare scenario for the firm

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Speaker 1: because it's losing assets. It's usually a nightmare scenario for

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Speaker 1: for creditors because these assets are being sold for values

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Speaker 1: less than what could be obtained otherwise. But there may

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Speaker 1: be some creditors who just want to quick payout, they

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Speaker 1: want to move on. Maybe these creditors themselves are short

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Speaker 1: on cash and they want the quick sale. So one

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Speaker 1: of your nightmare scenarios is going into bankruptcy, and then

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Speaker 1: the bankruptcy filing actually hurts the firm. The goal of

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Speaker 1: bankruptcy is to help the firm in some sense, at

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Speaker 1: least to give it time to whether the current crisis.

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Speaker 1: The last thing you want is a bankruptcy that hurts

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Speaker 1: the firm, and that's one thing you worry about. A

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Speaker 1: virtue of a pre pack is that you can you

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Speaker 1: can choose your own destiny. Okay, through the pre pack

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Speaker 1: you can you can get sufficient credit or consent to

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Speaker 1: a path that preserves value and avoid some of these

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Speaker 1: nightmare scenarios. And the reason for that is that in

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Speaker 1: bankruptcy the variety of voting rules that allow majorities to

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Speaker 1: outvote minorities. And so if you can design a pre

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Speaker 1: pack with majority credit or consent, you may be able

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Speaker 1: to avoid some of the night nightmare scenarios. And just

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Speaker 1: to nail the point even more clearly, as fire sales

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Speaker 1: are always bad, we live in an environment now where

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Speaker 1: fire sales are potentially more likely because asset values have fallen.

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Speaker 1: It's hard to sell assets true value, fundamental value in

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Speaker 1: this current environment. So the nightmare scenario is particularly worrisome

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Speaker 1: in the current economic environment. That's going to spur firms

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Speaker 1: as much as possible to avoid that nightmare scenario, perhaps

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Speaker 1: including using pre packs. Thanks for being on Bloomberg Law.

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Speaker 1: That's Edward Morrison, Professor at Columbia Law School. Thanks for

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Speaker 1: listening to the Bloomberg Law podcast. You can subscribe and

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Speaker 1: listen to the show on Apple Podcasts, SoundCloud, and on

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Speaker 1: Bloomberg dot com slash podcast. I'm June Brasso. This is Bloomberg. Yeah,