October 20, 2008
Many of our clients have been facing unprecedented new challenges as a result of the dramatic economic events that have occurred over the last month. The financial markets continue to evolve in Washington on a real-time basis and the daily volatile gyrations in the stock markets around the world have led to uncertainty, anxiety and issues of first impression for many of our clients. We believe that the events that occur in the coming months will shape not only the financial futures of many of our clients and their competitors, but also the world economy.
The U.S. Government has taken a number of steps in an attempt to help the economy and the credit markets recover. Among the most noteworthy programs are the following:
- The Treasury Department’s Troubled Asset Relief Program ("TARP" – created by the Emergency Economic Stabilization Act ("EESA") passed earlier this month), through which the government is authorized to purchase up to $700 billion in whole loans and mortgage-related securities as well as to invest directly in financial institutions;
- The Treasury Department’s money market mutual fund guaranty program;
- The Federal Reserve’s commercial paper funding facility, payment of interest on reserve balances and relaxed bank investment guidelines;
- The FDIC’s temporary liquidity guarantee program; and
- The SEC’s short selling initiatives.
These programs have all been discussed in our previous client alerts.
Clients Encounter Issues, Formulate Strategies and Find Solutions
We are currently assisting our clients in a number of critical areas. In light of the breadth and gravity of these issues, we felt it was important to share them with you so that you can take them into account in your own strategic planning.
- Liquidity Crises. Many clients are facing current or imminent liquidity crises. Those who have available lines of credit are in some cases drawing on those lines even before they have a need for the funds out of a concern that they may soon fail to satisfy financial covenants that must be met for drawdowns.
- Insolvent Lenders. The Lehman bankruptcy has raised concern among many clients about the availability of funds under their existing credit facilities. The potential insolvency of some lenders is yet another reason why some clients are considering early drawdowns on their lines of credit. We have also been analyzing the implications of an insolvency of the administrative agent under both term and revolving loan facilities.
- Early Contingent Restructuring Planning. After observing some of the largest and most sophisticated financial institutions in the world caught totally unprepared for the dramatic changes in the financial markets, many of our clients are proactively retaining advisors to comprehensively review their financial exposures, apply stress tests to their operating assumptions and provide contingent restructuring advice.
- Finding Alternative Sources of Capital. The closure of the debt markets has obviously been abrupt and widespread. Most of the major domestic and international financial institutions have indicated that they will significantly curtail or eliminate new financing commitments in the fourth quarter of 2008. This has led a number of clients who need to refinance their existing debt facilities, raise capital for acquisitions or raise working capital, to explore alternative financing sources.
- Acquisition of Companies with Distressed Valuations. Many of our clients with healthy balance sheets and strong cash positions are beginning to analyze both public and private buying opportunities. In some of these situations, they are exploring "loan to own" transactions (buying a troubled company’s debt to gain effective control) instead of acquiring equity positions. Clients also are looking more carefully at bargain opportunities through the bankruptcy Section 363 sale process.
- Takeover Defenses. In light of depressed stock prices, in some cases below book value and/or available cash, many clients are revisiting their hostile takeover defenses. Among other proactive measures, clients are preparing both ISS-approved and traditional "off the shelf" poison pills in advance of any hostile takeover activity in order to be able to nimbly respond to unwanted hostile raiders.
- Examination of Distressed Debt Positions. First and second lien issues and the often unread or misunderstood contractual terms of debt instruments have continued to take center stage. Investors are analyzing whether debt market prices fully reflect the contractual terms of those instruments. Issuers and investors are often surprised that the actual contractual terms don’t always reflect the terms understood in the market, or that there are ambiguities in interpretation of the terms that can impact risk and valuation.
- Real Estate Debt Acquisitions. Many of our clients are acquiring real estate debt despite the continuing challenges in the real estate markets. Clients are forming investment funds and purchasing whole mortgage loans, so-called "B-pieces" of mortgage loans (as well as more junior pieces), mezzanine loans and CMBS bonds. In the current environment, our active dialogue with the U.S. Treasury Department regarding government rescue programs has been crucial in advising on these acquisitions and dispositions.
- Participation in the Government’s Response. Many of our clients are interested in participating in the multiple government programs that attempt to respond to the financial markets crisis. Some are seeking to manage assets for the Treasury Department in the implementation of the TARP. Other clients are interested in purchasing assets from the Treasury Department or participating in FDIC or Federal Reserve programs. We have also worked with agencies on behalf of clients on eligibility rules.
- Public and Private Stock Repurchase Transactions. Some clients with healthy balance sheets, strong cash positions and depressed stock prices are negotiating the maze of federal and state regulations to repurchase their own equity securities in the open market. Similarly, some of our public company clients are repurchasing their securities from hedge funds and other institutional holders who need to liquidate their equity positions. This avoids open market sales by these holders that would further depress stock prices.
- Short Sale Compliance. Our broker-dealer and investment manager clients are having to quickly adapt to the SEC’s slate of new short selling requirements, including new Rules 10a-3T and 204T. We have assisted clients in understanding and interpreting the new requirements, obtaining guidance and relief from the SEC staff, providing insights into "street practice" for complying with the rules and updating their compliance policies and supervisory procedures to reflect the new regulatory regime.
- SEC Disclosure Issues. Public companies are facing the preparation of periodic reports in the midst of turmoil in the economy and upheaval in credit markets that have a serious impact on liquidity and other disclosures. Our public company clients are evaluating and revising their liquidity and cash flow disclosures, risk factors and related disclosures as they prepare their periodic SEC reports.
- Labor Reduction and Related Employment Issues. Many of our clients are facing the unfortunate task of planning and implementing layoffs, not only in compliance with laws impacting such programs, but also in a manner that will minimize fallout litigation. Clients are also renegotiating their labor contracts with unions where financial circumstances so require, as well as dealing with a host of other labor and employment related issues.
- Section 401(k) Plan Lawsuits. Some clients may also be facing ERISA "stock-drop" or "excess fee" class action suits alleging, respectively, that plan fiduciaries breached their duties to their Section 401(k) plans by continuing to offer company stock as an investment option, or that plan fiduciaries negotiated fee arrangements for services or investment purchases that are imprudently expensive.
- Congressional and Other Investigations. Congressional investigators and State Attorneys General have already begun to dig into possible "causes" of the financial markets crisis. Many financial services firms have received inquiries and/or requests for documents and testimony from the House Oversight and Government Reform Committee. It is only a matter of time before Senate investigators follow. In addition, the EESA either creates or gives authority to four oversight bodies – three of them new – and their roles in large part will be to scrutinize the TARP.
- Public Relations in Crisis Management. Many of our clients are facing major, company-threatening crises in the increasingly complex legal and economic environment. The preparation of a clear, concise and effective strategy for handling governmental agencies, the media, employees and the investing community is a critical component to the stability of our clients who face these challenges.
We are deeply involved in assisting clients in each of the areas discussed above, and we plan to present webcasts in the near future on many of these areas to detail the issues, strategies and solutions that our clients have implemented with our assistance.
We understand the difficult issues you face in these turbulent times, and we want to be part of your solution. We pride ourselves on the expertise and creativity we bring to your matters, and our worldwide resources stand ready to assist you. We will keep you apprised as we schedule our webcasts on these matters.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these developments. We have assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above. Please contact the Gibson Dunn attorney with whom you work or any member of the Financial Markets Crisis Group.
© 2008 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.