Top restructuring bankers are swamped with calls as companies are starting to 'run out of rope' - here's the advice they're giving clients to deal with the cash crunch

• The investment bankers who specialize in distressed companies and recession tactics are in high demand.
• Top restructuring bankers told Business Insider that they have been slammed with work as clients try to navigate to economic fallout from the coronavirus pandemic.
• This crisis is unlike any they've seen before. They've been advising companies on how best to preserve liquidity and how to deal with making tough asks to lenders.
• Ongoing restructurings have been upended, and many deals already in progress have been torn up amid massive price swings in capital markets.
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As the coronavirus crisis wreaks destruction across the US economy, business leaders are dialing up the investment bankers who specialize in recession tactics, defaults, and distress.

When companies find their balance sheets in shambles - whether because of gradual degradation or a sudden, unpredictable shock - restructuring bankers are deployed to clean up the mess and clear a path toward viable future operations.

Even if they're not already teetering on the brink, companies grappling with how to stay afloat are turning to restructuring advisors for help weathering a storm that will leave few unscathed. Some bankers might work with companies on creative financings, liability management, or other measures.

But bankers told us the current financial challenge is unlike any they've seen before.

"Not surprisingly, activity is way up. Conversations are way up," Andrew Yearley, a senior restructuring banker at Lazard, home to one of the industry's premier practices.

The story was the same with other restructuring specialists Business Insider spoke with: swamped with back-to-back calls the past two weeks (in-person meetings, understandably, are off the table.) It's a bright spot in investment banking, with colleagues focused on M&A and IPOs seeing work slow to a crawl.

BI interviewed a handful of the industry's most experienced restructuring bankers, veterans who've navigated multiple economic tailspins, to learn what advice they're providing to company executives, boards, and creditors.

Restructuring deals that were in the works several weeks ago are being torn up and reevaluated. And in the near term, it's a race for liquidity for most firms.

Companies that binged on debt prior to the crisis face bleaker prospects. Many are turning to lenders with previously unheard of requests for breaks - and getting them.

Projections of the depth of the economic fallout are stunning. A recession is now a foregone conclusion, with some banks ball-parking a second-quarter GDP loss of nearly 25%. Economists expect jobless claims could explode past 2 million, three times the previous record high.

"I think there's not a sector that's going to be unscathed," Soren Reynertson, founder of GLC Advisors, said.

Why this crisis is different

What started as an outbreak roiling primarily China has spread worldwide, rapidly crippling entire regions and business sectors as governments scramble to contain the death toll.

Entire cities and states in the US have been effectively shuttered, apart from essential businesses. That means multi-billion dollar industries like retail, travel, hospitality, and dining, among others, have entered a deep freeze.

"Unlike other dips in the market, the concern isn't only being felt among the most highly levered issuers. Fortune 100 companies are all evaluating their liquidity options and looking at every possible contingency plan," Roopesh Shah, a senior managing director in Evercore's restructuring business, told Business Insider. "The scope and breadth of this crisis - and the underlying social fear that is at its root - is what differentiates the current situation from previous downturns."

What could add to the calamity this time around is a tinder-box of $10 trillion in debt US corporations have amassed, thanks in part to low interest rates as well as lax covenants and standards in the years since the last financial crisis.

"A lot of companies that should've been restructuring, rethinking business plans, and rethinking capital structures, weren't," Todd Snyder, founder of TRS Advisors , told Business Insider.

"Companies that spent a lot of money, raised through debt, to finance acquisitions, dividend payments, and share buybacks - those are folks that are going to run out of rope in this type of market," Snyder, a three-decade restructuring veteran who helmed Rothschild's business for more than 15 years before starting his own firm in 2017.

Look no further than the airlines, which have been gutted by travel bans. American Airlines, which now has a market capitalization that's fallen from more than $13 billion in February to a little over $6 billion, has drawn criticism for requesting billions in government support after running up more than $20 billion in net debt while simultaneously spending more than $12 billion on stock buybacks since 2014.

One of the hardest components for companies is the market rout hit so quickly and the unprecedented volatility has persisted, providing little sense of what the economic reality will look like even a few days from now.

"I've been through a couple of these cycles. This one is unlike any previously just in its speed, the sheer volatility of the market, and probably most importantly, just the uncertainty of outlook," Yearley, who's been with Lazard since 1998, said.

That makes projecting revenues and other essential business-planning measures next to impossible. Public firms have been slashing forecasts and suspending 2020 guidance.

"The reactions from companies and clients has been similar in the recognition that now there's a new normal - and nobody knows what that is," Yearley said. "What they do know is this has been a sudden and fundamental change in their business prospects."

Cash is king

Businesses are seeing their revenue streams evaporate overnight. The primary concern for most companies at this point is liquidity: Do they have enough cash to buoy operations until the pandemic passes?

"Clients of all sizes are asking about liquidity. The single most critical factor that narrows a company's degrees of freedom and available options is a shortfall in liquidity," said Shah, who spent a decade at Goldman Sachs and ran global debt advisory and restructuring before joining Evercore in 2017.

"Companies need to protect themselves by reducing whatever costs they can, minimizing costs of operations. You have to draw down bank lines," Reynertson said.

That's why early on we saw corporate behemoths take action to preserve cash.

Global banks suspended share buybacks. Boeing reportedly start drawing down nearly $14 billion in credit facilities on March 11. Best Buy this weekend drew down its full $1.25 billion credit facility in addition to suspending buybacks.

Many companies, from hospitality and flex-space firms to conglomerates like General Electric, are already resorting to layoffs.

"Cash is going to be king here for a little while until things start to settle," Reynertson, who cofounded GLC in 2009 after leaving a senior role in UBS' restructuring business, added.

Some industries will be bailed out. Lawmakers early Wednesday morning struck a deal on $2 trillion relief package to mitigate the economic fallout. The bailout, the largest in American history, includes hundreds of billions in financial aid to corporations.

'Tough asks' to lenders

Even after taking drastic steps to stockpile cash will leave, many companies will be in danger of breaching covenants or missing interest payments.

The restructuring bankers Business Insider spoke with said they're advising companies to start having conversations with creditors to get a reprieve and buy more time. This echoed what some top restructuring lawyers told Business Insider - saying they expected some transportation and hospitality discussions with lenders and landlords to be resolved out of court.

"In a normal environment, those are tough asks. In this environment, every company is doing that," Yearley said. "The banks and lending community have lines forming outside their doors with these requests, and they're overwhelmed in and of themselves."

"If you have this exogenous impact to the economy, and you suddenly have rapid contraction that corporations can't adjust to in real time - it doesn't matter how inexpensive the debt you have is, if you have no cash flow with which to service it," Snyder said.

Yearley said he hoped that businesses requesting a "time out" from their loan burdens would be "pretty accommodating conversations," given the extenuating circumstances.

Snyder said he had seen some evidence of that already from the banks, which, unlike the financial crisis a decade ago, are among the most stable and capitalized pillars in the market.

"Banks, being more liquid in this crisis than going into 2008 and 2009, are being more flexible where they can be," Snyder said. "One of the things were seeing is you can go to your bank lenders and negotiate, in certain circumstances, practical work arounds. But of course, that depends on the crisis being relatively short."

It may also be in part because governments are pressuring the banks, which the Federal Reserve provided trillions in short-term loans to aid market liquidity, to bear some of the burden in stabilizing the economy.

Before having discussions with lenders, Evercore is telling clients to reassess their credit documents and ensure they understand all the terms, and to have a grasp of every fundraising mechanism available to them.

"They need to understand the financial maintenance covenants and project out a 'lower for longer' scenario. They should also understand every basket available to raise additional debt and equity if the need arises," Shah said.

"Understanding all of the terms in the credit documents, how they work together, and potentially creative or alternative interpretations of those terms, might be the difference between those companies that have a viable contingency plan in place versus those that don't."

Ongoing transactions are being torn up

Restructurings are nuanced, intricate deals involving an array of stakeholders. But many already in progress have been thrown out the window.

"One other outgrowth of the current crisis is the number of restructuring transactions that are just being torn up and where the debtor needs to start from scratch," Shah said. "There are numerous examples of lenders walking away from pre-agreed deals, financing sources balking at investing capital that was committed to be invested, etc."

The other bankers shared similar sentiments:

"Probably everyone is repricing risk. If there were deals on the table three weeks ago, they're all being reevaluated," Yearley said.

"Existing deals are very difficult. And we're having to rethink what we were focused on even two weeks ago," Reynertson added.

Many lenders are reticent to deploy capital due to market uncertainty. And companies may wind up in bankruptcy a lot longer than they'd expected, "all while liquidity is drying up and incremental financing is more difficult to find," Shah said.

But Reynertson expressed confidence that the deals would still happen, once the markets calmed down.

"If there was a logic to doing a transaction, it still exists, but the economics may have to be altered," he said.

"A company restructuring has to find a way to access capital and to meet its obligations. They don't vanish. They don't just liquidate. They have a reason to exist, it's just that their capital structures were designed for a different business reality."