Wednesday, February 26, 2020

The Coronavirus and Its Effect on Companies on the Brink

By Bill Siegel

What initially began as a health scare has ballooned into a broad-ranging concern, affecting economies around the world.  Businesses that were teetering on the brink of survival may succumb to bankruptcy.

 

Coronavirus and Bankruptcy

There is a good article in Bloomberg on how the Coronavirus forced a diabetes medication company, Valertias Holdings, Inc., into filing a Chapter 11 bankruptcy proceeding.  This situation could happen to you or one of your vendors or suppliers if you fail to plan ahead.

Valertias was already facing liquidity and debt default issues when Coronavirus affected its supply chain.  Its plan now is to sell its assets, which is a common tack taken in recent Chapter 11 filings.  Yet, no longer is it viable to truly restructure debt in Chapter 11.  Instead the usual plan is to sell the assets or convert debt to equity with the hope that unsecured creditors/vendors will receive some kind of a distribution.

Valertias’ problems are not unique.  Coronavirus is affecting businesses of all types and those on the brink of failing are feeling it even more.  The Wall Street Journal reported how Coronavirus is adversely affecting supply chains and that companies relying on a global supply chain need to act quickly to minimize the short- and long-term impacts on their operations. Companies need to analyze their supply-chain risks and then take precautionary measures.  Interestingly enough, the SARS virus and the Fukushima nuclear disaster are not good yardsticks because they were short-term events.  Coronavirus is more widespread as it impacts both supply and demand of the vast networks of global supply chains.

 

What Should You Do?

Just as with Valertias, small and/or highly-leveraged companies are most at risk, which increases the risk upstream to other smaller and leveraged suppliers. When demand increases, some of these same suppliers will not be in a position to meet the demand.  Some may even be out of business.  The Wall Street Journal article recommends that companies take the following steps:

  1. Set up a central emergency management center. At this point it can be virtual but should include a clear roster of participants with clear decision-making rules in case of a pandemic.
  2. Review the company’s product portfolio and the customer base in order to set priorities. If capacity is reduced, there will need to be rules for which products should be built and which customers should be supplied first.
  3. Review suppliers. Who makes critical parts? Are there alternate sources? What is the status of suppliers’ inventory?
  4. Plan for operating to maximize cash flow rather than profits.
  5. Maintain communications with federal and local authorities, as well as Chinese and other Southeast Asian friends and colleagues on the ground.

We live in a global economy.  Though many say the U.S. economy is strong and doing well, it is based on debt.  In addition, many of our companies are highly leveraged and anomalies like Coronavirus are rarely  anticipated.  Yet, now more than ever, there is a need to plan and analyze the impact of another epidemic…or pandemic.  Ultimately, some companies may decide to leave China and other Asian countries and bring the work back to the U.S.  Otherwise, companies like Valertias, which was highly leveraged but coping, will face the ultimate decision of having to file bankruptcy and sell their assets to maximize value. 

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