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well good afternoon everyone it's 12:01 and we see we've got quite a few folks on already more may be joining but we've got a lot to cover we'd like to go ahead and get started so I'll introduce myself my name is Alex matira I'm a partner here at pierce Atwood in the restructuring bankruptcy and creditors rights Practice Group and we're here to present the third of three sessions today sticking with our store motif this is the storm in recession aftermath this is FEMA coming in with cleanup so many of you have been attending other sessions we will be making the slides you're seeing today available they'll be emailed out to all participants all registered attendees probably by tomorrow but they're also available on our website you visit the main page Pierce at would calm scroll down to events they're arranged by date find today's date on May 20 if you'll find today's program and also links to the other two sections of this program the first session was batten down the loan documents in collateral the second session was forbearance and early stage workout strategies and today's the third session bankruptcy foreclosure and collection or as we like to think of it ready Get Set recession and today to talk about recession I'm going to turn it over to and introduce my partner if Cunningham to take us through what we're seeing and what you should be looking for Keith thanks Alex well welcome everybody and thank you for joining us this afternoon like Alex I am a member the bankruptcy and creditors rights team here at Pierce Atwood I chair the business practice group and I've been at this since 1988 so unfortunately I suspect it's our fourth recession since I started practicing law and one thing that we can say is while each recession is slightly different there are also some patterns that you tend to see out of each recession so looking here at our first slide you can see insights restore concurrent data and one of the things it's a commonality in bankruptcy filings is that bankruptcy filings foreclose mortgage delinquencies they track unemployment rates and that's a little bit frightening right now as you might imagine the Congressional Budget Office projects unemployment for the second quarter to be 15 percent we're looking at 15 percent again for the third quarter of 2020 and in the fourth quarter of 2021 CBO projects unemployment to be nine and a half percent so this could be a very long and painful trajectory and a very large increase in bankruptcy filings over the next year to a year and a half if you compare those unemployment rates to the Great Recession from 2008 to 2010 unemployment at the beginning of that recession was 5 percent and it rose to 10 percent so this really could be quite a historic in terms of bankruptcy filings and historic event a second thing is common to recessions is the lending tends to tighten and say you might say well how is that going to affect this recession and how does it affect you as a lender under the current circumstances and one of the things that I think we're going to see here pulling out the crystal ball is that if that holds true to form we're gonna see highly leveraged businesses with good fundamentals increasingly seek bankruptcy protection access to capital will be key and if the small businesses and medium-sized businesses that are your borrowers are able to obtain access to capital and can ride out the storm maybe that will dampen the bankruptcy filings on the other hand credit tightens that is traditionally has even those businesses that have good fundamentals it may be able to weather the first part of the storm we may find that they have some difficulty if there's a second shutdown that comes along and then last we're gonna talk a little bit about who are the debtors and you know it's obvious that restaurants and retail and hospitality industries are affected no question about that but one of the things that we do want to keep in mind is that at least one common holiday the last three recessions and each of them did have a particular focus of real estate in the last recession back in late 80s early 90s the focus again was on real estate and that's when the banks in northern New England in particular had difficulty and were taken over here the common thread will be hospitality tourism retail but there will be spillover effects and that's something that we've seen from all of the recessions so if you have a borrower that is heavy on rental property particularly if the rentals are retail oriented or hospitality oriented or bars and restaurants that's not a good sign and we do expect to see that the spillover will be particularly felt by those who have rental properties now having just spoken about what the commonalities are there are some differences as well and so I'm going to turn it over to Alex and maybe he can talk about some of those differences Thank You Keith so it's been attributed to Mark Twain that history doesn't repeat itself but it often rhymes and we've got a lot of rhymes in this sequence where we're seeing a lot of the indicators telling us what's coming but we also have some key differences and unlike the financial crisis in 2008 specifically we're not seeing the business failure is driven by tightened credit markets necessarily so in 2008 we had what were sound businesses that were being impacted because of lack of credit and an otherwise successful business who was running into a crisis in this recession we're really seeing the opposite we're seeing business shutdowns we're seeing operational obstacles due to of course the lockdown due to the disproportionate impact on hospitality industries in service industries and we're seeing that despite what looks to be still robust credit in the markets there's still a lot of availability there are a lot of folks with funds that are eager to get into the market and they're eager to provide rescue capital to businesses but we're seeing businesses that's we can't take advantage of it we're also seeing an unprecedented level of governmental involvement certainly with the PPP loans and other loans we've got what effectively looks like a charge account for businesses the way we've staved off consumer bankruptcies because of the availability of consumer credit people don't tend to file until they've run up their charge cards and they have no more credit available we're seeing now businesses in the same position so we've got an inversion of the credit crisis leading to failing businesses now we've got failing businesses that we ultimately expect to lead to a credit crisis we also have difficulty using our past recession experience to forecast what's going to happen in this recession we have an unprecedented health crisis with no clear understanding of when that crisis is going to be over or what the landscape will look like once it is in the lack of visibility into cash flows and projections is going to banks abilities to make loans on an informed basis with any expectation of the future performance of those company borrowers so that's presented a new obstacle together with again that impossibility of determining when this crisis will end and when these markets will start to revert to normal so in order to underscore that we're going to take a look at some current and past bankruptcy data and insolvency data to try to get a sense of where we're likely to head and what you should be looking for in that process and I'm going to hand it back to Keith to start that so this slide is really interesting the slide because what it shows is how the bankruptcy filings have tracked unemployment and at this slide you'll see in the gray line that's near the peak in 2010 you'll see in the middle almost 17 percent this is not the unemployment rate that's the official unemployment rate u6 is an unemployment rate that adds workers who are part-time purely for economic reasons but the official unemployment rate which is u3 really follows the same and what is really somewhat interesting when you look at this arc chart here this graph is the length of time it takes for the economy to recover or bankruptcy filings to come back to pre-recession levels after a recession so if you look at this graph you'll see 2006 it is bottoming out after the 2001 recession it spikes back up again two thousand eight nine and ten and then the bankruptcy filings slowly decline and it's not until about 2017 or 2018 did you actually reached pre-recession levels for bankruptcy filings so really one of the keys in this recession will be how long do we have sustained high unemployment in the employment numbers can rebound quickly because business is open quickly then it may not gain --fill as what some are predicting on the other hand if unemployment remains of high levels through all the way into 2022 a nine and a half percent as a reminder again at the end of 2021 s was projected then you're looking at unemployment levels and bankruptcy filings even in the end of 2021 that might be equivalent to what he saw during the height of the Great Recession back in 2008 2010 if we go to our next slide mortgage delinquencies and foreclosures you can see that the shape of this graph is really very similar to the shape of the unemployment in the bankruptcy filings and that's because mortgage delinquencies and foreclosures no surprise follow very closely with the unemployment rate and again the real takeaway from here is unless unemployment comes down quickly we're going to be in for a very long and painful period in terms of mortgage delinquencies and foreclosures you can see here in 2006 it's brought about after the 2001 recession and again until 2017 2018 are you back to where mortgage delinquencies and foreclosures and are on par with pre-recession levels so it's a long time to recover an unemployment will really be the key here in terms of how quickly can bankruptcy filings come down and how quickly can mortgage delinquencies be evaded we go to our next slide and this is an interesting slide that was prepared by the Federal Reserve Bank of Boston and what it shows is the total value on a monthly basis of mortgage and rent defaults for the New England states and not surprisingly Massachusetts has the highest but perhaps somewhat surprisingly Massachusetts accounts for about half for the value of all mortgage rent defaults this slide shows what those mortgage rents and defaults would look like without any unemployment insurance expansion or direct payments from the federal care act and then if you go to the next slide this is how those figures change based upon unemployment insurance based upon reopening and other stimulus and those numbers dramatically fall so if you look at the black boxes you'll see that just looking at above Massachusetts roughly 35% for renters roughly 17% for homeowners are at risk and if you layer over that stimulus unemployment insurance and care care Zak payments those numbers drop dramatically Massachusetts homeowners column you'll see a red box that's 5 percent that red box signifies if 95 percent of all eligible recipients took part in the unemployment insurance it's been offered or receives a $1,200 Kerr's payment and if you go up to the I'm sorry if you go up to the 5% box that that's actually 75 percent three which is the green triangle would be 95 percent acceptance and if it's eligible for so really government policy is going to make a big difference here and the question will be if we have a second shutdown will our government be able to support homeowners and renters again through either another expansion of employment insurance or through additional direct payments to homeowners and and others depending upon income levels and if the government is not able to provide that type of stimulus then that's going to have a dramatic effect on the defaults that you'll be seeing them under your powers moving to the next slide tightened credit we talked about that before and you know the problem with heightened credit is that it's going to reduce the supply of funds that are available to businesses to define when you know most need this was a study done by the st. Louis Federal Reserve back in 2016 and when it shows is once the recession hits there's a very distinct tendency of lenders to tighten credit so well we right now have quiet availability of credit both through private institutions as well as through the federal government the prognosis is not good if we follow the pattern from the last three recessions which is credible tighten and that will drive more businesses to reorganize and again if there's a second shutdown that's going to have dramatic impact on the number of businesses that can survive because those cash reserves they have today or the access to the line of credit that they have today that line of credit may be completely used up if there's a second shutdown so that's just something to be looking out for what will happen to businesses going forward and what will it be more orders in the New England states that effectively result in a lockdown of businesses to show what bankruptcy filings might look like I'm going to turn it over to Alex and he can go over the next slide Thank You Keith so there's a lot of data in this slide but what we've tried to capture here is a comparison between this impending recession in two prior recessions let me orient folks to the chart we've got the first section is labeled March 2002 the second is March 2010 and of course the last is March 20 what we're looking at in the first two are the three-month periods that essentially follow the peak of the recessions beginning and even starting to come out so what we tried to target was not the chaos not the eye of the hurricane when the recession was building but what did the aftermath look like as we were just starting to climb out of it and that's what we're looking ahead to today of course in this seminar but what we see in the prior two is at that three-month period which you'd want to forecast out for the entire year you multiply that by four to give you a sense of what the entire year would look like we had a bankruptcy filings for instance in Massachusetts business chapter 11s approximately 60 cases filed in the first quarter of 2002 over the year that could do that could expand out to you know two hundred and forty cases if they were on pace March 2010 we saw 44 cases filed you know that would expand out to something like a hundred and eighty cases for the year so fairly big numbers numbers that we haven't seen since probably the early 90s for bankruptcy as a reorganization vehicle for troubled companies you know we certainly seen a move away from that and in this seminar is not to talk about bankruptcy trends generally but to talk specifically about this recession but for a variety of reasons bankruptcy has not been the go-to reorganization strategy for companies when we see numbers this high it means something exceptional is happening now we look at March 2020 we look at that first quarter which reveals filings for businesses already 16 chapter Elevens in Massachusetts you take that number out through the rest of the year and it's going to quickly rise we're going to see you know considerably higher filings than we've seen for a number of years certainly since the end of the last recession and we're expecting that number to increase these are numbers from all the First Circuit so we're seeing most of New England we've taken Puerto Rico out of this and you know that skews the data probably double these numbers but it's an entirely different economic climates we're going to exclude those for the purpose of this but we can see that we're on pace to have a real swell of filings probably on the order of you know three to four times what we see in this chart so for the year we could be looking at filings even that exceed those in 2010 possibly that exceed those in 2002 but of course these are just numbers right we've got a chart full of data that tell us the number of bankruptcies they don't tell us we're in the economy those bankruptcies will be I'm going to turn it back to Keith to talk about which industries are we expecting to make up these numbers as we will go forward into this next phase so we go to the slide here and if you look in the column that is titled March 2009 will you'll se is the share of total unemployment insurance claims by state and the three states going across the top Maine Massachusetts and Vermont I'll focus just on Maine since it's the closest column to the left side in one of the interesting things about the recession in 2008 2010 was that if notwithstanding the fact that it was a recession that was caused by a credit crunch in mortgage industry really is where a lot of the focus was it was a broad-based recession and so when you look at the columns here you'll see unemployment insurance claims were just as prevalent in service industries as they were in construction and manufacturing was hit transportation you know was really the only major industry transportation agriculture and utilities that avoided the consequences or at least minimal consequences from that recession what's different here is the concentration in the service industries and if you look at the column march to 121 April for 2020 you see the UI claims for mean 36.4% in the service industries no surprise to anyone restaurants shut down hotels aren't able to book guests but that that is very different from what we've seen and so to the extent that you have portfolios that are heavy on retail or hospitality tourism particularly for the main economy tourism is the number one industry in the state it really is a discouraging number to look at to see the impact on unemployment insurance particularly when we know that unemployment insurance claims are precursor of bankruptcy filings if we move to the next slide this is really a question of history bar were built to weather the storm and this slide just really graphically depicts the impact that the shutdown on quarters and various states have had on just one industry the hotel industry in Maine the governor has entered an order that requires anyone coming into the state from out of state to quarantine for 14 days and as you might imagine for the hospitality industry in Maine that's the same thing as saying you need to shut down for the summer because the average stay in Maine for a tourist is four days so there are either be a lot of non-compliance with that executive order from the governor or hotels simply won't be able to book guests in Maine perhaps a little bit different from Massachusetts where a lot of people will escape to the Cape but if you read the Boston Globe you know there's a lot of chatter in prop provincetown and the other towns out on the Cape as to whether they should shut down during the summer and allow tourists into town or not so it's a real question here is your borrower built weather the storm and the things that you would typically look at a mount apply here you're going to look at cash reserves and access to credit you look at cash flow you look at the fixed costs and what the leverage are is for the business you look at the ability of the business to remake itself as an example you might look at the dependence on in-store verses internet sales you might also look at traffic to the store if you have a retail establishment downtown in Boston it might be a much different analysis than if it's a local store in western Massachusetts you know large employers in Massachusetts are saying that many especially the white-collar jobs those employees will stay at home for the summer and so you reduce the traffic downtown you're going to reduce the sales so those are all factors to consider but as Alex had mentioned in one of the earlier slides the one unknown here is what's going to happen will there be another shutdown and well business may be built whether the first shutdown it may not be built to weather a second shutdown let's take a look at some of the recent chapter 11 times because they're also helpful in trying to figure out where the problems may lurk and what you can do perhaps proactively to mitigate some of the damage that might come up so turning to this slide you see a kaleidoscope of recent chapter 11 filings when we began to prepare these slides a few weeks ago half of these companies would not have appeared on this slide it has been such a fast-moving development that we're reviewing and adding companies to our list on a nearly a daily basis these are of course large retailers folks who are impacted by the hospitality issues Airlines we've got gyms gym memberships have just taken an absolute beating because of the inability to stay open and allow folks to use their service certainly the restaurants and these large box and then we've got the cascading effect of these retailers and restaurants and gyms going out of business affecting obviously their lenders affecting their landlords affecting their vendors and suppliers and as we saw with unemployment affecting your workforce so this this will continue to develop into a pattern where we see more of these types of businesses and then the longer this goes on the more we start to see other types of businesses as sort of the second wave of collateral damage to these so what do we take away from this we look at what we're recommending to our clients and certainly what any lender should be thinking about be proactive the last two sessions really focused on some of these issues but they're worth repeating here so when you're assessing your risk you're looking at who are your borrowers who you're lending to what industries are you lending in to do you have manufacturing you have equipment loans do you have construction lenders loans on projects where you're likely to not be as deeply impacted as if for instance you're lending to restaurants and franchise ORS so knowing where you are are you in a state that relies on hospitality like Maine and Vermont are you in a state that's got a broader base of income and production that's going to have an easier time weathering these challenges and then you want to be thinking about not the objective but the subject of what about your loans what about the documentation what about the state of the collateral we talked a lot in the first session about preparing by reviewing loans being sure that you've perfected your interest in your collateral being sure that there are no mistakes and then we talked in the second session about using this tightening market as an opportunity to clean up any issues you might have are you entering into a forbearance agreement is that the place to reiterate possibly correct any deficiencies in your long documentation do you want to make sure you know where your collateral is what condition it's in who else has potential interests against it this is a time for very tight controls and monitoring of your borrowers this is not a time to check in once every quarter once every year to see how they're doing but take advantage of those covenants and those responsibilities and your loan documents for borrowers to provide financial information to pull statements and to take a real close scrutiny to each of your accounts as Keith talked about in the last couple of slides whose builds to weather this storm you know we're extending our storm analogy who's going to come through this and who's going to be dashed on the rocks of insolvency that really goes to this unique situation where we've got so little margin in the current financial circumstances for mismanagement for companies that maybe don't have their business fundamentals lined up ordinarily there's a little bit of play we've had very robust markets we've had broad availability of credit and we've had companies that maybe could be a bit sloppy with their management and their fundamentals we don't have that now and we're going to have that even less going forward so keeping the tight control on the business and knowing that management in place is keeping the tight control is critical you know how capitalized are these companies are we entering into forbearance and workouts certainly if we are then other lenders will be other creditors will be and then you want to have a sense of who are you who are you competing with against the assets and operations of this company what's their credit or mix because just as much as they are borrowers and indebted to their lenders in turn they become lenders in effect to their vendors and suppliers and any one customers and you want to have a sense of what's their debt ratio what's their mix so that you know whether it's going to be collectible this is an opportunity to also underscore when we mentioned a couple of times in the slides and verbally if you've got borrowers who are dependent on cash flow from rentals who are landlords to these big-box stores if you're determining your ability to lend and there tomorrow based on their cash flow you need to be mindful of the risk of them losing their tenants of tenants coming back from this lockdown at a reduced capacity as people have adjusted to working from home and that's going to dramatically impact their ability to bring in that income and to service the debt to you so having a sense of what their own debt mix is is going to be important as you monitor these loans so turning again back to Keith where we talk about your ability to weather this and the company's ability how do you determine whether you're able internally to do that Keith sure um you know we are gonna have a bit of a lull before the storm and again a lot of that will be determined by government action the extent to which capital is made available to businesses you've seen it through the PPP and as well to the workers themselves through unemployment insurance benefits being enhanced but internally now's the time to be thinking about when that storm does hit are we analyse staffed are we adequately trained there is going to be this law and taking advantage of it now really will be important because when the storm does hit depending upon how severe it is and it could be quite severe and really almost unprecedented since the depression the demands of just trying to keep up will make it very difficult to step up at that time and to Train folks adequately to deal with the mess that we may be dealing with the same holds true to looking at your internal processes and your systems they may function now but while they have function under stress bankruptcy moves very quickly and when a bankruptcy is filed as a chapter 11 case there'll be a series of motions will be filed on that first day you may have a collateral position but there may be a different from you and that did lender may be seeking rights and remedies that would impair your position as a secured creditor they may be seeking seeking super priority administrative treatment they may be seeking a priming lien so you'll need to be able to jump into action very quickly in some cases having an adequate notice system in place and a calendar system in place because deadlines in bankruptcy there's very little wiggle room if you miss a deadline you generally have missed that deadline and can't do anything about it it's important now to look at those systems and make certain that you're comfortable that when storm does hit that you'll be in good shape and then last you know everyone's going to be looking at their reserves but it's probably not a surprise or not a great prediction to tell you that Restaurant Equipment has an example is not going to be worth in six months what it is worth today and we're really taking a look at the collateral that you have and in some cases those collateral values may hold up quite well but another case is particularly retail industry and in restaurants and bars that collateral is just going to be a god of it on the market there's just no two ways about it not all restaurants are going to be able to survive this and so taking a look at your collateral and making sure that you've adequately reserved and you may have a fairly large unsecured portion of your claim the important going forward now it's going to turn over to you maybe you can talk a little bit about the different chapters in the Bankruptcy Code that folks can seek relief under Thank You Keith so we've we've got it our firm this is my third recession and we've got a bench that goes deeper back probably five recessions all together for some of the bankers in our audience today you may not have been through a recession yet we're already you know 10 years out of the last recession and we have enjoyed the longest recovery in US history so we're going to go through what might be familiar grounds to some people but it's certain to be new to some others the options in bankruptcy include chapter 7 which is a liquidation and then we've got two different reorganization chapters and we're going to go through these pretty quickly chapter 7 is available for both individuals and businesses it's a liquidation for a business that means the business cease operating as soon as the case is filed and winds down it also means that a trustee is appointed and management is no longer in control of the process for an individual the end goal of a chapter 7 is a discharge that means it's discharged of all dischargeable debts without getting into the nitty-gritty of what's dischargeable and what isn't most debts for an individual related to business debt are going to be dischargeable for a business there's not a discharge but then again when the business has wound down ceased operating and gone out of existence that's largely a distinction without a difference the business will no longer be operating there's no ability to collect any money outside of the bankruptcy from that company so a liquidation in Chapter 7 is a final event for most businesses chapter 13 is what you can think of as a reorganization on the individual non-business level individuals have a very simple reorganization process where they devote future income to plan payments to their credit creditors anything that's not paid through those planned payments is then discharged similar to the way it would be at a chapter 7 the difference of course is that there are partial payments to creditors in a chapter 13 similar to the way there would be partial payments to creditors in a business chapter 11 typically in a 13 it would be a five year plan and it allows the debtor also to term out mortgage defaults over the life of that plan the eligibility for a thirteen as we say here is based on the amount of debt there are limits there's a ceiling to the amount of debt that's available to be reorganized in a chapter 13 outside of which that individuals pushed into a chapter 11 so chapter 11 is available to the individuals and businesses businesses cannot file a chapter 13 they reorganize for chapter 11 the chief benefit to filing bankruptcy for a business or an individual in a reorganization is it buys them it buys them time to get their legs under them figure out a reorganization strategy and implement that strategy they do that through a plan of reorganization that gives some fairly broad powers to the debtor to be able to take some changes to their their debt and to propose some unusual turn for its repayment will be going into those in more details I'm just touching on that here the important thing to consider in an eleven is that the debtor stays in control there's not a chapter 7 trustee debtor management typically stays in place and runs the case through the bankruptcy bankruptcy through chapter 11 can be expensive and can take a considerable amount of time because of that it's long been a bar to smaller companies because they just can't afford the administrative expense and time involved in the process the newly enacted small business reorganization Act has provided and expanded that belief to these small businesses again we're going to be talking more about that but it generally lowers the bar to the bankruptcy filing and creates what we think of as a chapter 13 for businesses a streamlined approach that provides broad powers to the debtor leaves the debtor in control and allows the debtor to take action almost without regard to objections by lenders and other parties and interests but for many of our lenders we're going to see the most interesting issues come up into chapter 11 so we'll focus on that and I'm going to turn to Keith to ask a question of what happens in Chapter 11 what's the success rate look like for these companies well it's not good if you look historically less than third of chapter 11 d btors emerge from chapter 11 let me orient you a little bit onto this slide if you look at the inner circle of the chart there you'll see statistics from 1989 to 1995 and then the outer circles 2008 to 2015 a couple of takeaways back in 1989 to 19 95 fewer bankruptcy cases were dismissed more common occurrence was for a chapter 11 case to be converted to chapter 7 and a chapter 7 trustee would then liquidate the assets more cases being converted meant that there was more supervision so that lenders could at least be sure that there was a chapter 7 trustee looking over for the debtor shoulder to make sure that assets were being realized that they weren't being hidden you spin forward to 2008 2015 as Elex it said bankruptcies become very very expensive and very complicated and so the old days going back to 89 to 1995 you could actually have a reorganization in a reorganization with a smaller business moving forward to 2008 to 2015 it has become so expensive under the existing regime that it's very difficult to ever reorganize a business in most cases the assets are sold or just sold into chapter 11 what's called a 363 sale which is just a reference to the provision in the Bankruptcy Code that allows sales of assets free and clear of all liens and conferences so one of the questions that we had is will the new legislation that was approved by Congress creating a small business chapter 11 have any impact on the declining utility of chapter 11 for businesses and Alex what am i letting you take the next slide and go from there Thank You Keith the small business reorganization Act definitely promises to change that trend what we're looking at in this graph is business bankruptcy filings which you can see going back into the 80s and following through various recessions and ups and downs have consistently been on a downtrend for all the reasons that Keith just described we've seen fewer and fewer corporate bankruptcy filings certainly fewer successful bankruptcy filings why do we think the spra is going to make it principal so the spra has only been in effect since February 20th of this year and of course that timing was almost perfectly aligned with the kharkova crisis and we're seeing already responsiveness to increase the availability of the spra so what it is it's created a new subchapter to chapter 11 specifically available only to small businesses and small businesses are defined as businesses with total debt originally beneath that 2.7 million dollar cap you see the figure on the slide it's an odd number two just annually it's just over two just under 2 and 3/4 million dollars in debt that's ball secured and unsecured so a fairly low number when you take into account secured debt but still a number that encompasses a huge number of companies particularly in the restaurant and hospitality and service industry that number was increased it was almost tripled to 7.5 million as part of the Cure's Act to expand that availability in anticipation of many companies needing to take advantage of this there's no way to know yet but we already are thinking that we'd be surprised if that didn't become a permanent change thinkable largely depend on how many companies take advantage of this but if we see a trend where a lot of companies successfully reorganize in that bracket between the 2 point 7 and 7.5 million we're likely to see that remain in place become permanent to make that available going forward it is available to both individual and corporate borrowers so individuals who were pushed out of a chapter 13 because they exceed those debt limits normally would have to go into the regular expensive version of chapter 11 this affords them the opportunity to squeeze into the new sub chapter it's a streamline and make much more cost effective that process they do have to be engaged in commercial or business activity so an individual who simply has a high debt is not going to be able to take advantage but an individual whose debts are largely driven by personal guarantees liabilities will be able to enter that even if they also have significant personal debts such as a home mortgage or other personal borrowings the key differences to the small business reorganization provisions in Chapter 11 from a traditional chapter 11 or what makes it so attractive there's a small business trustees appointed in the case but the debtor still remains in control of the case trustee is there for oversight but not necessarily for control no creditors committees were appointed the traditional chapter 11 a creditors committee would be appointed that committee would that engage its own set of professionals which largely duplicate the effort of the debtors professionals and maybe compete with the efforts of creditor professionals on the secured lender side no committees in a subchapter 5 means a whole level of expense eliminated no quarterly fees are due to the u.s. trustees office the way they would be in a traditional chapter 11 and perhaps most importantly the debtor has an exclusive opportunity to produce a plan and to seek approval of that plan without competition from other parties it's a short period there's a 90-day deadline to get that done no separate disclosure process is required so it combines the two in one process thereby eliminating roughly half the hearings and pleadings involved a modification of principal personal mortgages on residences as possible which would not otherwise be and most importantly the debtor does not need to have an impaired class voting its support of the plan to the debtor can confirm that plan over the objection of some of the interested parties there's a lot of detail there there are a lot of technical issues there this is not meant to be a treatise that you can refer to as you navigate the plan process with your own debtors in your own claims but it does point out all of the things as a debtor does not have to do in a subchapter 5 case that drives down the expense the time and eventually the likelihood of success every one of those obstacles provides an opportunity for a debtor as we've seen in the graph that Keith walked us through without those obstacles insider' has a much higher likelihood of success turn now to an alternative we've been talking about bankruptcy but in Rhode Island at least and certainly in other areas to a lesser extent there are alternatives to bankruptcy we talked about sort of the pre-bankruptcy alternatives of workouts and foreclosure I'm sorry forbearance agreements in Prior sessions now we're talking about you've definitely hit an insolvency issue you definitely need organizational help but is bankruptcy your only option and as I say at least in Rhode Island traditionally receiverships have provided an alternative and a receivership can be thought of at least in a place like Rhode Island where there's an established statute in an established practice as a state court alternative to bankruptcy receivers largely operate as trustees do in a bankruptcy context they often have similar or even extended powers and in Rhode Island we've seen a culture develop of a very robust receivership practice giving rights of sale giving opportunities to amend and alter mortgages and most importantly the ability of the receiver to operate the business and continue to earn an income in service debt during the pendency of the receivership it's not code driven although it's technically overseen by the state court there's a lot less oversight than the federal process under bankruptcy court judge with the United States trustee reviewing and it often gives the secured creditor significant power to participate and possibly even to select the receiver that's appointed but like everything in this post coated environment traditional receiverships have been subject to change and I invite Keith to talk about ways that's developed just as we've seen traditional lending into additional enforcement develop much time on this slide just paying attention to our clock here we only have about 10 or 12 minutes left but for an island insolvency is a business down there and they could see I think handwriting on the wall that the small business reorganization provision in fact their receivership business in Ireland the Rhode Island courts started looking at in response to the coab in 1908 ooh allow businesses that are solvent meeting their debts prior to the pandemic shut down to reorganize receiverships and Rhode Island have traditionally been used in the case of liquidations and so the court is now looking at creating a new process a non liquidating receivership that will be very similar to the new small business chapter 11 bankruptcy provisions work is underway for legislation to document and allows that chorally allow these types of receiverships but basically this would be like the small business chapter 11 bankruptcy provisions that were recently enacted by Congress but with much more flexibility and with the same goals and that is a process that is inexpensive that is simple and that is quick so stay tuned but for secured lenders receivership can really be viewed as a strategic alternative whether it's a non liquidating receivership or the type of receivership that Alex just talked about it can reduce expenses it can allow a secured lender to stay in control or at least have some influence over who the receiver will be and when there are title problems the receivership can be a really solid solution because it allows the court to approve the sale of the property at the same time to quiet title so it's an excellent option in Rhode Island to a lesser extent it's utilized in other New England states and with that I'm just going to move over to bankruptcy essentials and these are just some of the basics of bankruptcy that those I've been through the process before helpful to be able to go to background and so the number one thing in bankruptcy is understanding who's on first base and by that I mean what's the pecking order in claims and of course being a secured creditor is the key if you're fully a secured creditor then you're going to recover and you may have to lay in payment but ultimately you'll get your dollars but the problem in a market like this is that you may be fully secured today and tomorrow you may be under secured because of a decline in the value of your collateral and now you're looking at having an efficiency claim which is a general unsecured claim and as experience teaches us as is fairly rare particularly in a recession for unsecured creditors to receive very meaningful distributions in the chapter 11 or chapter 7 case it's usually pennies on the dollar the second best place to be if you're a creditor would be that creditor that has super priority that is super priority is only for parties who are advancing generally only for parties who are advancing money closed petitions so sometimes you may be a secured lender you want to keep your debtor afloat to reorganize in that case you would seek court approval to provide debtor-in-possession financing after the bankruptcy filing date all the money that you advance after the bankruptcy filing they presumably it will be secured and at the same time if there's a shortfall in the value of the collateral what you would get would be a super priority claim saying if you recover money before anybody else is usually carve up for debtors counsel and maybe a carve out for the creditors committee if there is one it's a good place to be for lenders priority claims that doesn't happen those are the folks who are going to be ahead of your general unsecured claim tax claims unpaid wages and the like equity last in line not the place that you want to be so if you have a pledge agreement and an ability to exercise that pledge agreement you have to really think long and hard about whether that's something that you want to do in a bankruptcy because number one equity is last in line to recover and two it can have spillover effects on your other claims might be treated so if you have security unsecured claims it could have spillover effect on how those claims are treated our next slide talks about the automatic stay this is just basic bankruptcy 101 here the moment the case is filed all collection needs to cease against the debtor and that's an important point because the automatic stay only protects a debtor non debtors are not protected so to the extent that you have a guarantor of a loan that guarantor is not protected I will say there is one chapter in the Bankruptcy Code chapter 13 where come debtors are protected but in a chapter 7 case you're in a chapter 11 case you're free to pursue the guarantor without any need to obtain relief from the automatic stay of that carontour is not in bankruptcy another point that's worth noting is that letter of credit rights you are not protected by the automatic stay if you guess you'd a letter of credit for the benefit of a creditor of a debtor that claim is they claim by the creditor indirectly against you as a lender so if your letter credit reimbursement rates are not secured even after the bankruptcy case has filed a draw to be made against that letter of credit and you're just going to then have a claim against the debtor for the amount of the draw under the letter of credit relations day is possible it's beyond the scope of this webinar the ins and outs of obtaining relief from the automatic stay let's just say that if you are bound by the automatic stay and you don't seek relief from the automatic stay the consequences can be really quite severe and include in the case of consumers having to pay attorneys fees and potentially even punitive damages and the last bullet is probably worth noting and that is the request is generally made we want to bankruptcy proof whatever deal we have working with somebody that may be filing for bankruptcy and I'd like to get a bunch of waivers in my workout agreement or an answer to that is I am not aware of any way to bankruptcy proof a deal you can work with our clients put waivers into agreements in some cases they may be enforceable but in the vast majority of cases pre-bankruptcy waivers so bankruptcy waivers automatic stay as an example is not going to be enforceable as I said there there can be exceptions to that by and large those waivers are enforceable there are a couple of other general concepts that Alex is going to run through very quickly and I'll turn it over to him to do that Thank You Keith and we do see that we've got just a few minutes left so we're gonna run through some of these bankruptcy issues a little bit quickly some of them are technical but we do want to get to the last bit of material in the slides so adequate protection you've heard from Keith that your enforcement ability has been stopped by the automatic stay so what do you do obviously from the debtors perspective adequate protection which is not defined in the Bankruptcy Code means as little as possible and from the lenders perspective it usually means not enough typically what we see our courts entering orders requiring debtors to protect lenders against the diminution of the value of their collateral if your collateral is depreciating if it's subject to the need for insurance or if it requires any other kind of upkeep or maintenance to protect its value the debtor is going to be paying you that amount for over secured creditors typically that involves at least being sure it's insured and paying interest if not paying anything further on it what you're not going to expect to get or regular monthly payments in the contract amount those payments continue to accrue but you're not going to be able to collect them at least until a plan is in place or there's some other disposition of the collateral we also wanted to cover quickly cash collateral first of all banks should know what their cash collateral is is it rinses it receivables are you perfected in it assuming you are prior to a bankruptcy you're not really thinking about cash collateral your interest is rolling over into new amounts that are collected or accrued your interest is rolling over into proceeds that's not necessarily in a bankruptcy and you don't want your borrower using her image without your in the court's approval of that typically you enter into an agreement with the debtor that provid s for a rollover lien in newly created accounts or whatever other form that cash collateral takes and some protections such as the debtors commitment to a budget and your ability to get regular reporting to monitor it the most crucial issue with cash collateral is keeping an eye on the debtor and making sure you know that it's not being used without Authority in that the debtor is conforming to the agreement in the budget if it is being used with authority so that is the biggest pitfall first cured lender is knowing that collateral is out that are in protecting it I also going to turn it over to Keith to talk about some early bankruptcy events some highlights of the early stages of the case again we'll go through these quickly to cover our last bit of material on outside of bankruptcy what enforcement provisions are available so again when a bankruptcies filed an automatic stay goes into effect it doesn't matter whether it's a voluntary bankruptcy or an involuntary bankruptcy the automatic stays in effect and it's no defense for you to say I didn't receive a copy of the bankruptcy notice of filing or the copy of the petition if you have actual knowledge of the bankruptcy you're bound by the automatic stay you need to cease all bunning efforts you need to stop all collection actions foreclosures in process you need to take care of that as well you will receive a notice of the filing of the case and it's going to provide certain information to you that's critical again this goes back to our point about are you adequately staffed and trained and you have appropriate processes in place for handling bankruptcies because that notice of filings contain very important information including a deadline for potentially a deadline for filing a proof of claim and as well when you can object to the discharge debt or the discharge ability of a debt of the debtor and it's pretty rare I think that lenders subject to discharge and discharge ability and intent that those are important pages to know in chapter 7 case the objection deadline is 60 days after the first date that's set for the meeting accreditors and the first meeting of creditors is usually in the first 30 days of the case for secured lenders in chapter 11 really it's important to pay attention to those first day motions particularly F if you have an interesting cash collateral because that cash collateral is cash that it's used in you're not gonna see it again so protecting your cash collateral is very important and it's not unheard of to see debtors proposed to use your rents to fund other properties to meet the expenses of other properties and so that's something you really need to keep an eye on and debtor possession financing again that's something we really to keep an eye on if you're not the dip lender you just want to make certain that whomever is the dip lender that they're not impairing any rights you have as a secured party Alex and you can talk a little bit about the other two notices or early events in the case that are important there Keith so the 341 meeting of creditors that's the initial meeting that's your first opportunity to get face-to-face with your borrower sometimes you've never had that opportunity so for lenders it's a chance to check in get confidence in the borrower's management I am to challenge that or raise issues it's conducted by the u.s. trustee all creditors can attend but it's very typical to see the secured lender or 10-3 counsel the claims bar date this is the date by which the secured lender would have to file a claim to share in any distribution that would include any claim for any deficiency amount so if you're fully secured you're relying on your collateral if you're not fully secured this is where you assert that deficiency claim for the difference we're going to move ahead only because we're we're very close to the limit we're respectful of your time and we'd like to cover our last section and I'm gonna turn back to Keith to talk about what happens to secured lenders in chapter 11 maybe the inverse question is what can a debtor do to you in a chapter 11 well the debtor can do a lot in Chapter 11 of course they can adjust the interest rate on loan they can change the amortization on loan they can do a lot of bad things to a Thunder so having somebody as experienced in plan process is really critical in this in this process I'll just talk about a couple of things here and you know really where the mischief comes in for the secured lenders often times the debtor is going to try and create an impaired class of claims so they can cram you down as we saw in a small business reorganization act crammed down can be done there as well and they don't need an impaired class in the small business reorganization act cases but in a traditional Chapter eleven you need one impaired class to accept the plan and and hear what the creditors will do is they will classify your deficiency claim separate from all of the other unsecured creditors and that gives them the impaired class and then they can try and cram you down voting another place to look is oftentimes the deficiency queen really is held sideways all of the other claims and that's another case where they'll try to classify a secured lender the deficiency claim separate from all other claims and that way the secured lender doesn't control the voting process because as you can see in the slides in order to confirm a plan to debtor to obtain acceptance of one impaired class of claims two-thirds and dollar amount about he claims one-half in number of voting claims so it's that two-thirds and dollar amount of voting claims the debtor is trying to play games with now I need to talk a little bit about what the treatment is of secured claims in bankruptcy yeah so in bankruptcy as you heard from Keith the debtor can start to amend and tinker with your loan agreement to change things like the term the interest rate and the most important and often the most surprising is that the debtor can also change the value of this interest so when the case is filed you fix in time the value of the collateral and if that collateral is in a low cycle and is significantly lower than when the loan was made the debtor secured interest and say the secured creditors interest could be limited to that new lower value and that is true even if the collateral subsequently appreciates the lender does not get the benefit of that appreciation they're stuck at a lower level so the debtor can strip the value down to the current value of the asset they also typically will do things like lower the interest rate to what is arguably a commercially reasonable rate but it's certainly not the rate you'd offer debtor in this financial circumstance and they can amortize that rate out over usually extraordinarily long periods 20 25 30 years over a 5-year repayment plan with an enormous balloon at the end which is a sort of typically Hail Mary refinance strategy which may or may not come to fruition so there's a lot of risk for a secured lender in that situation attorneys fees interest late charges they're all possible if the secured creditors over secured if the value is not there in the collateral typically those are not going to be included and the lender will not be able to recover those from the collateral looking part of that deficiency claim the alternative to bankruptcy often is a foreclosure or the subsequent event in a bankruptcy where the lenders obtained relief is to go to foreclosure which necessarily often involves eviction if the tenant is still in the space where if the borrower is also with the tenant in the space the key takeaway for the foreclosure process is that it's going to be different like everything under the cares Act and under our various states responses to this health crisis there are changes to what is already a highly technical process and that they are changes which are evolving as we speak so I'll ask Keith to address the overall cares Act changes and changes in main I'll turn to Massachusetts and we'll go beyond not to wrap up with some of the other New England states Keith thanks Alex so I'll just very briefly touch on as as we talked about earlier bankruptcies will depend largely on unemployment unemployment rate comes down quickly or whether it drags on so that we're seeing a lot of bankruptcies in 2021 one of the things that you see is that unemployment ends bankruptcies not filed until well after all available cash is used so there's usually run up an unsecured debt one of the benefits to the cares act is the cares act has allowed homeowners who have federally backed mortgages to postpone their payments and you can see in a slide here that if you're experiencing financial hardship - directly or indirectly to the co19 emergency but we have forbearance is granted that forbearance is initially up to 180 days but it can be extended to 360 days this would include all of the FHA VA USDA Fannie Mae Freddie Mac loans all those are federally backed or they're GSC backed loans so one of the things I think we're going to see here is because of the ability of particularly lower income borrowers to take advantage of these forbearance periods that it's going to postpone at least for some period of time a lot of the foreclosures that we think support closure so we saw back in the last recession but again all bets are off if there's not Thunder Wade it comes to the rescue of homeowners because once that 360 days expires it could be a mess in Maine evictions and foreclosures are basically stayed there are some exceptions on addictions so if you have somebody it's destroying the property the governor has included a carve out for that and on foreclosures at least right now they're on hold until the end of May but that could very well be extended by the court and at least right now we just know it's no no foreclosure action in Maine until at least in a lot of what Keith is described for Maine is true for the other states the short answer on foreclosure is it's more than likely stayed wherever you are if it's going to be delayed if the process is going to be slightly different than your ear accustomed to in Massachusetts there's a temporary moratorium on foreclosures that moratorium is extended through the earlier of August 18th or 45 days after the emergency declaration by the governor is lifted but that can further be extended and again this is already a highly technical process and these moratoria have made it even more technical and certainly require lenders to reach out to counsel to assist them in that process what we're doing here is highlighting to you that there is a lot to be mindful of and that you want someone fluent in this process to help navigate it because it's changing on a day to day basis state by state with a variety of responses by each jurisdiction and that's true also of the remaining states turn it back to Keith to look at New Hampshire and Rhode Island I mean it's just really more of the same and sure there's a state of emergency power stable state so it's a relatively quick process comparing the Maine where you have judicial foreclosures rather quickly but for of course the forbearance provisions that are in the cares Act may dampen the foreclosure activity in New Hampshire and Rhode Island or the same as you can see there there was a 60-day foreclosure moratorium it was a voluntary agreement by lenders in Rhode Island but as Alex said you just need to really stay abreast of what's happening in the individual states and the orders in the states because there's a good chance that wherever you're operating whether it's in the four states that we've covered here or outside of them and you have to have a borrower there's properties outside of New England there's a good chance that there's some sort of eviction or foreclosure moratorium so I think that wraps up our slides for today we happy to answer any questions that any folks have you can email either myself or Alex our email addresses are here on the last slide and as Alex had indicated top of our webinar marketing department will be sending out copies of these slides to all of the registered attendees and as well they'll be posted on Pierce a quiz website if you go to the events section of the website and then look under 528 2020 you'll see this particular webinar and you can download the slides from clicking on that link so you thank everybody for joining us today we apologize for going over a couple of minutes we wish you well in dealing with your borrowers and hopefully you could minimize your losses and theirs as well thank you everyone thank you very much