While your business may seem to
be far removed from the problems of Wall Street and increasing foreclosures, you’ll most likely feel
the impact here in Northeast Ohio sooner rather than later.
“Business owners need to consider
how the overall economic slowdown
will affect them over the next three to
nine months,” says Shawn M. Riley, managing partner of the Cleveland office and
chair of business restructuring at
McDonald Hopkins LLC. “They need to
anticipate the impending challenges and
become knowledgeable about their legal
rights and alternatives if they find themselves in a crisis.”
Smart Business asked Riley how difficult he thinks matters will get in the near
term and what companies should consider if they end up facing restructuring
or bankruptcy.
What impacts will the subprime mortgage
crisis and the drop in home values have on
business restructurings and bankruptcies?
As homeowners see their mortgage
rates reset, they will be forced to spend
more of their monthly income on housing. This will crimp spending on durable
goods, automobiles, appliances and
remodeling. Already, some of the manufacturers of these products are seeing
downturns. Chrysler, Ford and General
Motors predict that 2008 will be down
from 2007 and certainly from 2006. This
will have a ripple effect through the
economy. Consider, for example, the
manufacturers of auto parts. As their
orders from automakers decline, they
will need to start thinking about the cuts
they will have to make. They might target areas such as cleaning and janitorial
services, supplies, etc. Then, what we’ll
probably see, especially in the second
half of 2008, is an increase in the number
of businesses that file bankruptcy or that
are in some type of distress — for example, with their own loan agreements.
They may need to go out and raise more
capital, sell the company as a stand-alone, combine with another company,
or liquidate.
What other macro-economic factors will
impact business restructurings?
The increase in oil prices will have a
definite impact in Northeast Ohio. In
addition, the inflation rate is driving the
cost of goods higher and, when coupled
with the decline in wealth resulting from
reduced home values, consumers are
spending less. This feeds the cycle of
economic slowdown.
Will Northeast Ohio fare better or worse than
the rest of the nation?
Unfortunately, I think it will fare worse in
the near term. Manufacturing drives much of
our local economy — particularly auto manufacturing — so we may bear a disproportionate part of the slowdown. All evidence
from media reports indicates that Cuyahoga
County and Northeast Ohio have among the
highest foreclosure rates in the nation. The
good news is that if we feel the pain first, we
may begin recovering sooner than other
parts of the country. If that is not the case, we
should still be OK because as demand for
automobiles and other goods begins to rise
again throughout the country, demand for parts manufactured in Northeast Ohio will
begin to rise again, as well.
How will the 2005 changes to the Bankruptcy
Code affect business restructurings?
Before the code changed, bankruptcy
was often considered a viable way to save
a business and then turn it around. Today,
it is still an alternative, but all parties —
owners, lenders and trade creditors — see
it as ‘less attractive.’ In the past, there were
no limits on how long a company could
stay in bankruptcy. Now, they have 18
months to complete the process. These
shortened deadlines make the process
more difficult.
There are other disincentives, as well.
Historically, companies could offer senior
management bonuses to stay and complete
the reorganization process. Now, there are
very severe limitations on that, so there is a
very real risk of losing management.
Another disincentive is the new deadline
that a company has to make decisions about
buildings [e.g., leases, stores], which is 210
days from filing. This creates a lot of pressure to make decisions about assets rather
quickly.
The result of all this is that companies
may be more reluctant to use the bankruptcy process and may try to get more
creative in exploring alternatives. For
example, the owners or lenders might
decide it is best to sell the business to a
competitor that can absorb the overhead
and run the company better. Some companies do end up deciding bankruptcy is the
best solution. A benefit is that it is a comprehensive process that resolves all issues
once and for all.
What is your advice for companies that
decide to move forward with bankruptcy?
If you don’t have the process completed
within 18 months, another involved party
— such as a lender, creditor or union —
can come forward with its own plan. So
move quickly or you run the risk that others will take charge.
SHAWN M. RILEY is the managing partner of the Cleveland office and chair of business restructuring at McDonald Hopkins LLC. Reach
him at (216) 348-5773 or [email protected].