Marc McNamee of Neal & Harwell has seen a lot in his 40-year career in bankruptcy law.
First came the fall of the Butcher banks in 1983 and 1984. Then there was the Tax Reform Act of 1986 and the savings and loan crisis of the late ‘80s and early ‘90s. The dot-com boom and bust and the 2008 financial market collapse followed.
Each wave could be traced back to human activity, unlike the crescendo of bankruptcy filings McNamee expects to see as a result of COVID-19.
“There is no way that we can have this level of unemployment and disruption in the service economies and not have fallout,” he says.
Bankruptcy courts will be full of coronavirus fallout, experts believe, but attorneys haven’t yet seen much of an increase in cases. That will come late summer or early fall, predicts Nancy King of EmergeLaw. The lull in new filings can be traced to extreme uncertainty around the state of the economy, the timetable for recovery and the status of relief programs. Bankruptcy filings — unlike, say, unemployment rates — are a lagging economic indicator.
“Most companies right now are either in the stunned phase, or they’re in the ‘I want to work it out with my bank’ phase, or possibly the ‘I’ve gotten a PPP loan, I think I might make it’ phase,” King says. “When all that comes to an end, I think Chapter 11 is going to end up being an option for a lot of those companies.”
King left her longtime job as a clerk in federal bankruptcy court to enter private practice late last year. It may end up being auspicious timing: As bankruptcy filings rise and fall with the economy, so too do the number of local attorneys specializing in bankruptcy. The supply problem could be exacerbated in Nashville, where a decade of recovery and rapid development has seen more and more lawyers specializing on the front end of business deals.
“That’s all we do, so we’re ready,” King says of EmergeLaw. “But other firms aren’t fully staffed for it. It’s almost like there’s a — not a whole generation but a long period of time where young lawyers haven’t been trained in the bankruptcy field because there was nothing to train them with. Bankruptcy is going to be a popular field of study for people in law school.”
McNamee sees the same issue. He’s looking at younger attorneys at his firm who need “a little more seasoning” — that is, real-life bankruptcy experience.
“When there’s no bankruptcy work to be done, good commercial lawyers have to find a way to get paid,” he says. “They go off and they do front-end work. The same thing happens when the real estate market dries up. When there weren’t any real estate loans being made, when there weren’t any big business deals being done driven by real estate, those lawyers had to go and find something else to do. So at that time, they became bankruptcy lawyers.”
The flow of those skills was massively one-directional during Nashville’s 2010s boom, which saw the area economy add 288,000 jobs from the beginning of 2011 through the end of last year. Debtors filed 48 Chapter 11 cases in U.S. Bankruptcy Court for the Middle District of Tennessee in 2019, down from an annual peak of 158 during the Great Recession. That number is sure to rise dramatically and will call for many lawyers to dust off their restructuring skills.
One prominent Nashville industry bearing the brunt of COVID’s impact and likely to make a notable contribution to the expected bankruptcy boom: tourism and hospitality. In April, local employers in the leisure and hospitality sector laid off about half of their workers — roughly 60,000 people in the Nashville MSA.
“They’re going to take it in the neck,” McNamee says.
Companies like Ryman Hospitality, he says, will experience “a great deal of suffering for a period of time, driven by the fact that they simply can’t fill their resorts.” Other businesses that rely on large crowds on Lower Broadway are being similarly hit by the pandemic shutdowns.
Another of Nashville’s most prominent industries, health care, could see mixed results as some companies suffer from months-long cancelations of elective procedures while others reap the reward of large-scale investment in certain priorities.
A less visible beneficiary of Nashville’s recent growth could also take a hit: office space and commercial real estate. As many Nashville workplaces have transitioned to telework during the pandemic, executives may find it attractive to downsize their office leases. That could include some of the large corporations that have moved their headquarters to the area in recent years. Meanwhile, local and state governments strapped for cash will have less to give to lure new headquarters to town.
“We might see a lot of real estate bankruptcies as we come out of this and some companies decide they kind of like this model and they don’t need as much space as they had,” King says.
The nature of recent growth in Middle Tennessee — as well as many other areas — could put more businesses in danger of falling into bankruptcy. Specifically, it’s been built on debt that has become more attractive thanks to very low interest rates.
“Companies have been using debt to their advantage, so they’re all pretty leveraged up,” King says. “Now, most of them probably can’t make their debt service and they’re going to end up having to file to deleverage. That’s similar to what happened before with real estate. There was just no other option. They’d tried to work it out with the bank and it had failed.”
That situation could create a competitive advantage for some businesses that come out of the Chapter 11 process “lean and mean” — unburdened by debt.
While McNamee stops short of calling bankruptcy a competitive advantage under current circumstances, he points out that “clearly, bankruptcy does not have the stigma that it did 40 years ago.”
Some businesses will be able to work out their issues with lenders without filing for bankruptcy protection, the attorneys say. According to McNamee, lenders prefer to work with loan recipients during hard times rather than push for bankruptcy, in part because it’s hard to get repaid in full through the bankruptcy process. That approach was evident during the early shock caused by COVID-19: Many lenders in the area, from small community banks to some of the country’s biggest financial names, rolled out forbearance programs for their customers.
But those programs will run their course at some point and Chapter 11 is inevitable for some.
“The early filers will be the ones that jump rather than being pushed,” McNamee says. “The later filers will be pushed. They’ll be pushed by their lenders; they’ll be pushed by the venture capitalists who backed them. They’re going to want to become more efficient, and they’re going to want to convert, to the extent that they can, debt to equity.”
But with the challenge of a new wave of bankruptcy filings looming, one of the city’s most experienced bankruptcy attorneys might be sitting on the bench. This time around will be worse than 2008 or the fallout from the 9/11 terrorist attacks, and less predictable, McNamee says, and banks are going to become much more risk-averse after years of free-flowing cash.
“I don’t know how ready I am,” McNamee says. “This would either be my fifth or sixth financial downturn, and I don’t know that I’ve got the fire in the belly to go ride out another. I’m 66. I’ve had all the fun I can stand. I’m happy to turn it over to my well-positioned lawyers in my firm.”
Regardless of how closely he’ll be involved, McNamee knows one thing: “It’s coming.”