On June 15, 2009 Rein Krammer of the firm's Litigation Group was a panelist at a luncheon sponsored by the German American Chamber of Commerce of the Midwest (http://www.gaccom.org) entitled "What Can Suppliers and Manufacturers Learn from Current Industries in Crisis."
As Rein and his fellow-panelists noted, there are many lessons to learn from the current crisis. Rein noted that suppliers have learned to prepare for bankruptcy. At the pre-bankruptcy stage, suppliers are negotiating more aggressive contract terms that provide additional protection when the customer enters bankruptcy, such as shorter payment terms. Suppliers are managing risks with customers by providing payment protection, such as third-party guaranties, letters of credit, or collateral, in the event of non-payment. In the event of bankruptcy, suppliers are more willing to take steps, as permitted under bankruptcy law, to require customers to assume executory (or ongoing) contracts and cure any defaults.
(For a more detailed discussion on bankruptcy and creditors' rights, see our firm's updates called "Danger Signs Ahead! Preparing to Take Action When Automotive Customers File Bankruptcy" at www.masudafunai.com/Files/7667_Client_Advisory_April_09.pdf and "Managing Sales to Automotive Customers" at http://www.masudafunai.com/Files/8523_Managing_Sales.pdf).
While Rein focused on the bankruptcy aspects of the current crisis, other panelists dealt with the business aspects. "Cash is king," said Dr. Walter Maisel, President and CEO of Kostal North America. In line with this, Dr. Maisel is looking for savings within his company to generate cash, rather than using credit, which he called an "addiction." Dr. Maisel is more intently focusing on maintaining cash balances and more closely monitoring his customers. He acknowledged that, with 50% of his company's business with General Motors and Chrysler, the bankruptcy of these companies has been painful. Events have moved quickly and Dr. Maisel noted, "Reality is a moving target."
As if to underscore the importance of cash, another panelist, Bruce Comiskey, Managing Director, International Corporate Banking at Fifth Third Bank emphasized the difficulty of obtaining financing now. He cited the startling statistic that 60% of clients would likely or were in danger of being in violation of their loan covenants, compared to 5% in normal times. So, while Mr. Comiskey called banking's capital structure "still strong", it is clear that banks are more risk-averse than before. One of the consequences of this will be that companies will experience slower growth. Growth will not come from excess leverage (the "addiction" to credit, as Dr. Maisel called it). Rather, growth will be based more on a company's "sustainable business model." Mr. Comiskey recommended borrowers in crisis be pro-active and approach their lenders with a plan to restore profitability.
Luke Baer, President, Bosch Management Services North America, described his company's efforts in forming a risk mitigation team charged with constantly monitoring customers' financial standing, ability to pay, and risk of insolvency. As did Dr. Maisel, Mr. Baer acknowledged the impact of the Chrysler and General Motors' bankruptcies on his business. Both he and Dr. Maisel emphasized the importance of acting early before default and before bankruptcy.
Overall, Rein Krammer says the experience of participating on the panel was stimulating. He learned a lot from the observations of successful executives facing crises in their own industries. Rein notes that their experiences are very similar to those of the clients he has been working with in navigating the General Motors, Chrysler, and other auto industry bankruptcies. "While we are hoping for stability and a return to more prosperous times, the consensus of the panelists with whom I participated is that the consequences of the current crisis will be with us for a long time."