(Submitted to the Post-Gazette in response to a recent article)

First the disclaimer:  I am a bankruptcy and creditors’ rights lawyer.  I generally represent vendors, lenders and creditors.  I have also helped a few companies reorganize in Chapter 11 bankruptcy.

People (media and otherwise) are wailing about how bankruptcy equates to shutting down.  Recently, the P-G had some consultants concluding that bankruptcy won’t do for automakers what it did for the steel industry.  Notably, there were no bankruptcy lawyers quoted in the article.  There is fear-mongering that bankruptcy will mean millions of jobs lost and thousands of businesses closed.  With respect to the Big Three, this couldn’t be farther from the truth.  It is extremely rare for a bankruptcy of a business this size to result in a total shutdown and liquidation.  Typically, if a company enters into a Chapter 11, it will be able to reorganize its business or become acquired by someone else who will run the business.  In both scenarios many employees keep their jobs and suppliers continue to sell product to the company.  Under a Chapter 11, there are some powerful tools which allow a Judge to terminate or change contractual relationships.  In particular, the bankruptcy judge can order the restructuring of labor contracts.  I suspect that this, in conjunction with the potential loss of shareholder value, is the driving force behind Congress’s desire to “bail out” the Big Three.  There are very powerful lobbyists on the side of the unions and major shareholders that are joining forces.  The problem as I see it, however, is that the American public is being misled about the effects of Chapter 11 bankruptcy.

Chapter 11 reorganization will not create investment and borrowing ability for the Big Three, but it can create an atmosphere to allow that investment or credit on terms that might interest investors and lenders.  Lenders are more willing to lend to a bankrupt company when they know the company’s “old” debt will be discharged and they see the company bringing costs under control.  This gives the lender confidence that its “new” loans will be repaid.  At the very least, it can allow public (government) money to be loaned, directly or through bank guarantees, on a priority basis and only after a change in the business model has been proposed and vetted.  Congress has recently asked the Big Three to provide it with a plan as to how they will restructure their business model in order to be profitable in the future.  The irony of this demand is that proposing a workable business plan is exactly what Chapter 11 requires.  The difference, however, is that in Chapter 11, the creditors, employees and shareholders get to vote on whether the plan is viable.  In Congress, it is only the politicians who get to vote. 

With or without reorganization in Chapter 11 bankruptcy, fixing the Big Three will not be easy.  Jobs will be lost and some supplier businesses will fail.  Those businesses will fail because they became dependent on an industrial model that was ill-conceived and is past its prime.  All else being equal, would we expect the government to bail out the buggy-whip maker when the horse-drawn carriage maker went out of business?  Would we have kept the carriage maker alive just to save the whip maker?  No, we would not.  Bankruptcy reorganization will allow the Big Three automotive companies to have a breathing spell to restructure their business models and create more competitive products.  For a better analogy than the article’s comparison to the steel industry bankruptcies, take a look at the airline bankruptcies of the past two decades.  The airlines operated on an outdated and unprofitable hub and spoke business model.  Bankruptcy afforded many of the larger airlines the opportunity to restructure labor agreements and reorganize more along the lines of low cost carriers such as Southwest.  Just as would happen in Detroit, the airlines kept operating in Chapter 11, suppliers kept selling goods and services, and most people kept their jobs.  Yes, there was pain, but the airlines are still operation, many of them profitable, and the American economy did not collapse.  Despite fear mongering that consumers won’t by cars produced by a company in bankruptcy, people kept flying on planes and racking up miles on airlines in bankruptcy.  NONE of the Big Three will file for Chapter 7 liquidation.  If you hear any politician, lobbyist or Detroit executive say that’s a likely result, tune them out because they are either ill-informed or not telling the truth.  Even if one of the Big Three did file for Chapter 7, some creditor would surely ask the Court to force it into a Chapter 11 and for the appointment of a Trustee to preserve the business operations as a going concern.  Actually, I am surprised securities litigation has not already been initiated against GM executives for making such reckless comments over the past days.

Bankruptcy is much more complex than Congress, the media and Big Three executives are telling the public, but on some level, it comes down to whether or not we can and should save a sick business (or 3 sick businesses).  Regardless of who is to blame for Detroit’s problems, not one person has said how giving them taxpayer money will solve any of their problems.  Bankruptcy is an option to facilitate a responsible and workable business plan.  It may not be the most ideal situation, but it is the best option we have.

Bankruptcy is not the ideal solution.  While the discharge of debt and the termination of contracts are powerful tools, they aren’t the “cure” for the sick business model.  That cure will have to occur through thoughtful change.  Closing the business is a change.  Figuring out  how to build a product that people want, at a price people will pay, would also be a change.  Bankruptcy can facilitate that kind of change, but bankruptcy is a means, not an end.

I’m pretty confused about what Washington is doing/has done with the $700 billion and how that relates to the automakers.  Let call them the OEMs (original equipment manufacturers).  The OEMs claim they need help from the government or they might file fail.  Officially, they don’t like the idea of bankruptcy, but they clearly have the ability to get legal advice from the biggest lawfirms in the world.  A Chapter 11 filing by any of them would be huge and attract the biggest bankruptcy firms around.  So, what if one (e.g. G.M.) filed Chapter 11? It would certainly be painful and scare people.  In a Chapter 11, they would have to adjust their operations and their model so that they could convince their creditors (or at least a Judge listening to their creditors) that their plan was “viable” and they would most likely survive under the Plan.  They could cancel contracts including, with some higher levels of proof, their union contracts.  They would have to negotiate to try to get an agreement with the Unions, but in the end, the Judge could terminate the contract or modify it.  The Unions could refuse to accept it and strike, which could kill the company, but that may be like putting a gun to their own heads.  UNions have been known to do that.

The suppliers would get hurt, too.  Amounts owed to them might be delayed or not paid (or paid only cents on the dollar).  There is a  lot that GM could do to keep the suppliers it needs in business if it makes sense for its new business model.  It could close plants, adjust workforce, eliminate waste and do other things to make it more profitable.

In the end, the government could provide financial help for the company’s exit from bankruptcy.  Or it could provide guarantees of exit financing bank loans. 

A GM (or other OEM) Chapter 11 would facilitate the reorganizations that are needed.  It would be expensive (probably a couple billion in professional fees), but that is better than tens of billions being poured down the black hole of theur current business models.  Many are crying that an OEM “bankruptcy” will be an economic disaster and would cost millions of jobs.  That is a scare tactic.  Maybe it would costs many jobs.  Maybe it would hurt suppliers.  But what is the realistic alternative?  They must change and so far nothing the customers, the regulators, Congress has done has been able to make them change.  Now they are over the barrell and they, like so many others, say “this time we’ll really change.”  Yeah, right.

The New York CLLA meeting is always busy.  This year, there was a buzz of excitement relating to a few areas.

First, everyone was taking about how the economy affects them.  For a group of collection and bankruptcy professionals, it was interesting to hear the dichotomy.  Pure collection folks (especially consumer collection folks) were bemoaning the reduction in collections.  Although they have more accounts, people are less able (willing?) to pay.  The commercial folks said the same things, but seemed a little more pessimistic.  Why?  In most places (with wage garnishment), the debtor will eventually get back to work.  A failed business is generally “failed” forever.  Those with creditor bankruptcy or workout practices were much more upbeat. They are busy (and making money).

Another area of “buzz” was the League’s Stategic Plan.  There was focused discussion and energy behind the movement of the Key Strategy Teams toward their first year objectives.  Click here to view the Plan.

Finally, there was an excitement around CLLA’s new Executive Vice President, Oliver Yandle.  Oliver is proving himself to be an asset in his very early weeks.  Now having been through one Fall meeting, I am sure he is even better position to help the CLLA reach its strategic goals and more.

I loved all the discussion this week about whether we were in a recession.  Any of us in the credit, collections and bankruptcy world know we’ve been in a recession for months.  Whether the economists can agree on what the definition of what ”is” is or not, things have been tight, tough and shrinking for a year or more.  Ask any banker.  Whether the government officially uses the “R word” or not is only relevant to those that think they have been in denial (or, perhaps, expecting most of the citizens to just believe what they say).  Either way, things are tough, going to get tougher and going to be tough for several months (or years).  So, fasten your seat belt, hunker down, make good solid decisions, but always be prepared to take advantage of opportntties.

“What opportuntities,” you ask?  Well, if things are slow in your credit department, use this time to review existing accounts to make sure they comply with your policies on documentation, limits, payments, etc.  If that’s all done, have your credit workers do some customer service calls.  Nothing pressured, just a “How are you doing?”  You may learn some things.  If that’s all up to date, find some productive work for the best people.  When things are slow, do what you can to hang on to the best people, they are the ones you’ll miss most when things pick up again.

Okay, it’s a shameless plug for the book (Get P.A.I.D. a Guide to Getting Paid Faster) and the system, but it is also a reminder of how important it is for businesses to pay attention to their credit extension, monitoring and collections when things are tight.  One might think it is benefical to extend more credit to buy sales in this atmosphere.  In some businesses, in some market segrments, that might work.  But it is very risky and must be done cautiously and thoughtfully.

In general, businesses are having a tougher time paying their bills.  At a minimum, they are saying they are having a harder time and using the ecomonic issues as an excuse (or reason) to hold onto their cash.

Today, a customer of a client told me he could send the $9,000 payment today, but he wanted to hold onto it for a few days just in case.  (I read that as “just in case something more pressing requires the money”).  He said he’d pay a premium for the few days.  I said he was paying a premium since the default interest rate of 18% had already kicked in.  He whined, then said he’d send the $9,000 now!

‘nuf said?

I suppose the lowering of LIBOR is an indication to some that credit is easing, at least on Fleet Street!  Most of the “main street” businesses probably don’t feel that yet.  Not sure if that is a measure of credit that will filter downanytime soon.  LIBOR is the London Inter Bank Offered Rate, a rate measuring the interest charged between banks.  Until recently, many US banks used that as an alternative for Prime.  Recently, LIBOR went through the roof, an indication that credit was tight.

When a company files a Chapter 11 case (or even before-when there is time), a big issue is how to fund operations post-filing.  The Debtor-in-Possession (DIP) needs to make arrangements with its current lender(s) or a new lender to take on the additional risk (and rewards) of a DIP loan.

With the credit crisis, DIP lending is getting harder to find.  A Wall Street Journal article today says:

“Debtor-in-possession, or DIP, financing is essential for the lawyers, layoffs and other restructuring necessary for a company’s rebirth. Exit financing is used when a company “exits” reorganization. Banks have been eager to take part in this market because the loans are the first to be paid back and command high interest rates.

“Without the lending lines, companies that would normally survive bankruptcy will have to quickly sell assets. Potential buyers may not be able to borrow either, meaning companies could be forced to liquidate immediately instead of working out their problems. That could cost tens of thousands of jobs across the economy.”

Chapter 11 is a necessary evil in our economy.  Just like with bankruptcy in general, if companies can’t restructure and manage their debt, they won’t take the same risk or, worse, they won’t be able to get out of an unforseen problem to, once again, be a successful, profitable employee and contributor.

Let’s hope things settle down soon so, at least, the companies needing to reorganize can do so.

…That’s hard to do when it seems like we have no control over the loss of a large percentage of our personal net worth.  Real estate values down, stock market values down.  Twenty-five percent (or more) of some peoples’ assets gone in a couple of months.

So, hard do you stay calm?  Well, as an individual, you take the long view and recognize that the markets always come back (unless you think this is really the end of civilization as we know it!).  In that case, you plan for when they start coming back (perhaps in a year or two).  If you are unlucky enough to need your invested money in the next couple of years, you have a problem.  I feel for people expecting to retire in a couple of years.  If they still had all their money in the market, perhaps they were not getting (or taking) good advice.

As a business owner or manager, you have to consider your market and customers and how the recession will affect them.  You should adjust accordingly.  If you have a business that will grow during this time, plan to take advantage of the market.  If your industry will suffer, then plan to take advantage of the opportunities to attract good employees from others in the industry, give good value nd god service and attract markt share.  If possible, use your cash wisely to be prepared for the upturn.  My father taught me a system for use that the craps table that had me conserve my cash so I could be around when the “good roll” came.  If you are too risky and plunge into things, then you may not be at the table when the good roll comes.

I follow that advice regularly.

Bob

“Credit” is the topic of so many discussions these days.  From the $85 billion “loan” the US is giving AIG to the effect the credit “markets” have on business, to the impact of the mortgage (credit) crisis.

An area getting less focus (and more deserving of attention) is the importance of credit granting practices of businesses.  From micro-business to multi-national, businesses must be looking more carefully at their lending policies now.  I say “lending,” because your selling on credit is making a loan to your customer.  If it wasn’t you making the loan, the customer would have to go to a bank or other lender.

On the one hand, it is a matter of how well the borrower can handle the credit (cash flow, assets, business plan, etc.).  On the other hand, how well can the lender/seller can handle the loan?  What is the credit availability for the business to meet its obligations?  What is the profit margin on the sale as compared to the expected repayment terms.  In my book, Get P.A.I.D. A Guide to Getting Paid Faster, I talk about the “The Payment Gap” and the “Red Zone.”

The Payment Gap is the time it takes the customer to pay, measured from the sale.  If your costs of credit extension (Finance costs, Opportunity costs, Collection costs, Relationship costs, Replacement costs) are too great and if your customer is delinquent, it can not only eat into your profit, but can eat up your profit.  At that point, you would have been better off not making the sale in the first place.

My point is that too many businesses don’t think enough about making the right sale (from a credit perspective) and just think about making any sale!

Today, more than any time in the last 20 years, owners and managers must think about these issues and, more importantly, do something about how their business goes about the business of extending credit.

…that we would have to prop up Fannie, Freddie and AIG at the same time?  There are so many interesting discussions going on around these actions.  Where do we draw the line?  What interest is really being protected by putting these scores of billions of Treasury dollars into these companies?  What would have been the result if we let one (or more) of them actually fail?  Where does the money come from to do this?  Could we afford to not do it?

I haven’t even begun to think of all the questions.