DROOMS WHITEPAPER

INSOLVENCY & BANKRUPTCY:

Selling in Uncertain Times

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The 2008 financial crisis, which prompted the deepest economic

recession since the nineteen thirties, saw markets freeze and a record
number of commercial bankruptcies and bank and brokerage-house
failures. Its aftermath is arguably still being felt. Among the 25
billion-dollar public companies that filed for bankruptcy in 2008
were the two largest in US history to date: Lehman Brothers
Holdings and Washington Mutual.

Despite government responses to COVID-19
and the introduction of emergency measures, the
latest pandemic is causing businesses to face
new and unprecedented challenges in what is
predicted to be the bleakest economic period yet.
Among the most affected are the retail, airline
and automotive sectors as well as shipping,
restaurants and hotels.
Retailers, already struggling as sales move online,
are facing a historic crunch with at least thirty US
household names alone at risk of having to file
for bankruptcy protection in 2020. According to
the National Retail Federation an estimated
$430bn in associated revenues could dry up in the
next 12 weeks. Department stores in particular
are teetering on the edge.
United Airlines intends to cut capacity by 50% in
April and May 2020 and is expecting a $1.5 billion
revenue drop in March 2020 compared to March
2019. It is not alone. A number of airlines are
requesting staff to take unpaid leave and have no
plans to hire employees in the immediate future.
The likes of Norwegian Airlines have taken more
drastic measures making 90% of their staff
redundant in March. Billions in grants and low
or no-interest loans have been requested by

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representatives of some of the largest airlines to keep the industry
afloat. Some have already been approved.
The rapid spread of coronavirus has reduced the demand for cars
putting at risk the livelihoods of close to 1.3 million Americans
alone. Since the beginning of March the value of Ford, Fiat,
Chrysler and General Motors shares to name a few, plummeted.
Particularly problematic are the supply chain disruptions affecting
automakers, the majority of which rely on parts manufactured and
imported from China.
An estimated 6 million work in the sector including in the wider
supply chain. According to the latest March 2020 forecast by
Statista, the share of catering and hotel companies in Italy at high
risk of insolvency in 2020 as a result of the coronavirus outbreak, is
predicted to surge considerably, particularly in a scenario where the
pandemic lasts throughout the summer.

Global shipping markets have also been majorly impacted, with

the slash in demand for goods from China having a direct effect on
everything from oil tankers to container ships.

With social distancing and lock-down measures firmly in place the

hit to the hospitality industry worldwide is expected to be colossal.
Britain’s hospitality industry alone contributes more than £120bn a
year to the economy and is the third-largest sector for employment.

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Different options exist

Contrary to popular belief, businesses at risk of insolvency or bankruptcy
can still be of interest to investors particularly when bank financing offers
are available.

Buying a company out of insolvency can help key market players expand
capacities through strategic acquisitions. Shrewd and liquid buyers might
also be on the lookout for valuable business assets for sale at reduced
prices.

Despite demand, for many, selling in the event of business bankruptcy

or insolvency is daunting. Various options do exist, however. Where
restructuring measures have been unsuccessful, a struggling business
on the brink of insolvency can:

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1. Carry out insolvency proceedings
Where a lack of liquidity has reached crisis levels and has not been
the direct result of the COVID-19 outbreak nor is there a prospect of
resolving an existing illiquidity, there is an immediate obligation by
directors to file for insolvency, usually within 21 days of cash-flow
insolvency and/or over-indebtedness. The associated liability and
legal implications should insolvency delays occur can be a major
risk for business owners. Given the debt related burden which often
leads to lower purchase prices, business owners can rarely initiate
the sales process prior to insolvency proceedings.
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2. Proceed with a sale
A sale can still take place even when a business is struggling.
In some jurisdictions, particularly Germany, if there is reasonable
evidence that recovery can occur and where the insolvency is
triggered by the effects of the corona pandemic, business owners
may even be relieved from the obligation to file for insolvency until
30 September this year in line with recently introduced emergency
measures.
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Selling during insolvency proceedings

This can be done in two ways:

1. Insolvency plan procedure 2. Transferred restructuring

Put forward either by the insolvency administrator or by the
debtor, an insolvency plan enables the secured creditors and
ordinary creditors to determine the realisation of the insolvency,
its distribution among the creditors, the handling of the proceedings
and the liability of the debtor after the termination of the insolvency
proceedings.
When restructuring by transfer, the assets of a company or part of
a business are transferred to another legal entity in the form of an
asset deal. The insolvency administrator conducts the purchasing
negotiations. As a rule of thumb:
The new owner must continue the activities of the former company
The old liabilities must remain with the insolvent company

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Drooms a reliable partner

for every company sale
Due diligence is an essential yet underestimated part of both restructuring and
insolvency procedures. Popularly used to streamline mergers and acquisitions, IPO’s,
Nonperforming Loan transactions and commercial real estate sales, virtual data rooms
(VDRs) can have a significant impact on both the speed and effectiveness of dealings
particularly with regards to data collection and analysis.

A highly functional and secure platform enabling organised access to documentation

at any given time is particularly useful at the beginning of a corporate restructuring
process in order to collect critical information and develop an appropriate restructuring
program. Once determined, a VDR can be used to divest certain units of a business, in
line with a business’s strategy. Similarly, when it comes to insolvency, trustees or
liquidators duty-bound to divest assets at the highest possible price can shorten
timelines and limit market factors likely to disrupt a deal.

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Virtual data rooms can offer:

Fast setup and support Proper indexing of data

Aside from the generous free prep phase that many providers Information can be structured immediately making the overview and
offer with immediate and continued access to documents once it search of documents easier and the identification of potential gaps
ends, full time dedicated project management is often also available in records simpler.
around the clock in multiple languages. Services tend to include
but are not limited to the collection, digitising and indexing of
documents.

Flexible access to documentation 24/7 Auto allocation of documents

You can identify relevant parties requiring disclosure to particular Depending on the provider and their use of machine learning and AI,
documentation and allow them access to data around the clock, large volumes of incoming documents selected and uploaded by the
wherever they might be operating. user can automatically be analysed and sorted into the required
index point with increasing accuracy over time.

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Ease of search A centralised Q&A

You can run a pre-selection of the documentation and assess a
deal’s risks and opportunities with the advanced search and filter
functionalities characteristic of certain providers such as Drooms,
whose Findings Manager feature is context-sensitive recognising
words, synonyms and semantic patterns.
The ability to respond to and manage multiple lines of inquiry
quickly can be critical to the success of a project. A built-in, fully
self-operating Q&A function increases efficiency and keeps relevant
stakeholders up to date.

Improved reporting

The analytics and reporting functions enable a better grasp of the

project and provide much needed insight on who’s accessing what
and when.

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Risk reduction & improved cost efficiency

Enhanced and uninterrupted access to data shouldn’t come at a cost
to security. VDRs on the whole maintain data integrity by preventing
information leakage.
The viewing and access to documentation for example can be
controlled and limited, particularly useful when wishing to invite
multiple third parties or buyers to the table without wanting to share
who those parties inevitably are. Advanced permission controls are
also available and include editing where only additions are allowed
and editing with approvals for content management. Even after
download, a dynamic, personalised watermark down to the single
second provides further control.
Many VDR providers will have a set of security standards they
follow, and some will demonstrate full compliance to strict data
protection regulation such as the GDPR. To further minimise
wrongful processing, modification or loss of data its worth enlisting
a virtual data room provider who has ISO-certified proprietary
servers based in Europe. Such a focus doesn’t just reduce the risk
of a data breach but also the legal danger of non-compliance.

To learn more about Drooms’ market leading

data room solution Drooms TRANSACTION click below.

Discover Drooms TRANSACTION

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