eNews May 7
In the News
May 7, 2020
|I. Communication Strengthens Creditor-Customer Bond During COVID-19|
|II. COVID-19’s Impact on Pharmaceuticals|
Creditor-Customer Bond During COVID-19
—Andrew Michaels, editorial associate
The coronavirus has certainly thrown a wrench into the gears of the business-to-business credit industry, but like well-trained mechanics, credit professionals are consistently assessing the situation and using the best tools for the job. When asked about how their operations have changed since the initial outbreak, several credit managers agreed one of the most valuable tools wasn’t necessarily technology-related, but instead, one without a price tag: communication, specifically, with customers.
Like all industries, credit managers are feeling the impact of COVID-19. Last month, NACM conducted its April 2020 Coronavirus Credit Impacts survey, where more than 300 credit professionals shared their latest experiences with revenue and customer losses as well as shifts in credit-lending practices. Roughly 70% of respondents said they have suffered financial losses—more than 25% losing more than $1 million. Furthermore, nearly 50% have lost customers because of COVID-19, with more than 10% losing over 100 customers.
However, as English theologian and historian Thomas Fuller once said, “The darkest hour is just before the dawn,” meaning there is still hope during these trying times. According to NACM’s survey, nearly 70% of respondents experienced such hope in the form of new customers. American Osment Credit Manager Tom Hamm is among them, as he said the industrial janitorial supplies and cleaning equipment company is bringing in lots of new business and expanding established accounts. Yet, while American Osment is supplying high-demand products at this time—hand sanitizer, wipes and disinfectants—Hamm said communication remains the essential link between the credit department and their customers.
“We communicate with customers as we always have [in] any and every way possible,” Hamm said. “[The amount of communication] varies with the customer, [but we reach out to them] at least monthly and, in some cases, daily. We help those who help us help them.
At Boise Cascade Building Materials Distribution, Area Credit Manager Cynthia Hymes said strong communication helped her department build relationships with its customers before COVID-19, which continued at the onset of the outbreak. In late March, Hymes said, she and her colleagues reached out to customers that they thought would struggle the most with payments to see how they were responding to COVID-19 and if they had any concerns.
“Mostly, we just asked if they were going to continue business as usual, or if they had planned to shut down or work from home,” she said. “We wanted to have a heads up on some of the smaller accounts that would miss payments. I do think it’s important to work with our customers to help their business stay open, but most of our customers are part of the essential business industry and are open and doing well.”
The credit industry still has a long way to go before operations return to some state of normalcy, but Hymes said communication is and will continue to play a crucial role in getting there.
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COVID-19’s Impact on Pharmaceuticals
—Michael Miller, managing editor
Battling supply chain disruption is one of the many side effects of living through the COVID-19 pandemic. It began in the U.S. weeks ago as media outlets started reporting paper products would be the first to go—now the once-stocked shelves in grocery stores and retailers across the country are empty. The supply chain was broken as consumers began panic buying and overbuying prior to retailers implementing a limit per customer. As the impacts of COVID-19 continue to spread and states begin to reopen, supply chains are still recuperating and developing across a multitude of industries.
Some industries have been hit harder than others including the health care industry, which can be broken down further into medical products and pharmaceuticals. These large, multi-national pharmaceutical companies are in a race to find a vaccine for COVID-19, yet there are still many unknowns about the outbreak’s impact on the industry and how different businesses are dealing with everyday operations.
What NACM has gathered from its two coronavirus impact surveys from March and April is that credit department functions continue to operate at a pre-COVID-19 level, albeit perhaps outside of the office. Orders, sales and new customers are down across the board, and credit departments are hearing from customers on a much more frequent basis. But again, it depends on the industry.
Jerry Grabner, credit advisor with ParMed Pharmaceuticals, said he hasn’t seen much of a change yet from a delinquency or payment problem standpoint. “Usually, there’s a 60–90-day lag from when problems develop to when we start to see payment issues.” ParMed generally acts as a secondary supplier in the industry, which includes hard-to-get products if a primary supplier is out, he said. “We provide next-day shipping late into the evening so we act as a just-in-time inventory supplier.”
The overbuying by consumers doesn’t just end with paper goods. “This has resulted in a dramatic spike in sales to our customers as the public is stocking up on their meds to avoid having to leave the house,” said Roger Scales, credit manager with NC Mutual Wholesale Drug Company. “The added sales are good. The collecting for the added sales is the more challenging part as our customers have to be paid to, in turn, pay us.” Scales also noted there has been no change to his credit department operations
At Smith Drug Company, Director of Credit Tony Acevedo is getting used to a workload increase due to the uptick in business activity and adjusting to remote work without having the amenities or equipment that’s in the office. Smith Drug has also been impacted by supply chain issues. “Early on, [customers] were concerned with supply chain issues, so they bought up heavily mainly based on speculation. They thought supply chains would be cut.” Acevedo expects heavy returns and nonpayment from customers that can’t sell the products. On the opposite end of the spectrum, “we bought additional inventory because we were worried about supply chain products from China and India.”
According to a Chemical & Engineering News podcast, “most of the people dealing with China tend to have inventory. But if this doesn’t straighten out in the next three months, we can have some real problems with supply disruption.”
The next wait-and-see item of interest in the pharmaceutical industry is if, or when, a way to stop the spread of COVID-19 comes to fruition.
“If a vaccine or treatment was to come out, if we stock it, it’ll fly off the shelves,” said Grabner.
How to Use Trade Credit Insurance
In this FCIB webinar, Trade Risk Group’s Jay Tenney will take a look at How to Use Trade Credit Insurance. Credit insurance is a tool for companies to protect against the risk of a customer default, improve their existing credit management practices and increase the likelihood of obtaining favorable financing terms. Join Jay on May 12 as he presents an overview of credit insurance—the risks covered, benefits, uses and costs. Learn key issues and potential pitfalls.
Emergency Tolling of Mechanic’s Lien
Deadlines in Ohio
—Jeffrey R. Appelbaum, Esq., John B. Kopf, Esq., Stephanie Schmalz, Esq.
The swiftly enacted Ohio Coronavirus Relief Bill (“HB 197”) ostensibly extends recording and other mechanic’s lien deadlines under the Ohio Revised Code. However, given uncertainty created by the bill, it is recommended that original deadlines be honored as if they had not been tolled.
HB 197 tolls any “criminal, civil or administrative time limitation or deadline under the Revised Code” which “[is] set to expire between March 9, 2020 and July 30, 2020.
- “Civil” deadlines appear to include the deadlines under the Revised Code’s mechanic’s lien statutes, including, for example, the deadlines by which someone must record a mechanic’s lien, serve a Notice of Furnishing or commence suit on a lien. It is unclear, however, if the General Assembly anticipated all potential consequences of extending all of the various deadlines, which can impact the validity, amount and priority of liens.
- The only deadlines which are tolled are those which “are set to expire” between March 9, 2020 and July 30, 2020, while Section 22 of HB 197 is in effect.
- For example, if the date of last work on a commercial project is May 17, 2020, the 75-day deadline to record a lien would have been set to expire on July 31, 2020, and one would have to record the lien on or before July 31, 2020—so the 75-day clock on the deadline is not tolled in May, June or July.
Length of Toll
HB 197 temporarily stops the clock for deadline expiration between March 9, 2020 and the earlier to occur of either July 30, 2020 or “the date the period of emergency ends.”
- There is no credit for time which has already lapsed before March 9, 2020—credit is limited to any time that is left when the tolling period ends.
- For example, if the date of last work on a residential project was Jan. 10, 2020, the clock on the 60-day deadline to record a lien (which would have been due March 10, 2020) would stop on March 9, 2020. If the governor declared the emergency over on June 1, 2020, the resumed deadline would be June 2, 2020.
Some Reasons Not to Use Tolling
Apart from the uncertainty in how courts might apply and interpret HB 197, there are other practical reasons for not relying upon the temporary tolling permitted under the new law.
- Public Projects. A “lien” on a public project is actually a claim against the project funds. If, for example, a subcontractor postpones service of an affidavit of claim using the tolling relief under HB 197, it can lose the ability to encumber the project funds if the project owner pays the general contractor in the interim. Similarly, if the claim affidavit is recorded later by using the tolling relief under HB 197, the subcontractor might lose a preferential lien position as to funds that are encumbered.
- Residential Projects. If a subcontractor postpones recording a lien using the tolling relief under HB 197, it can lose the ability to encumber the property if the project owner pays the general contractor in the interim.
- Other Reasons. Recording sooner can increase pressure and incentive for the project owner or upstream contractors to resolve payment issues so that they can more easily transfer the property or borrow money. Recording sooner may also help to prevent the lien from being “avoided” in bankruptcy if the project owner later becomes insolvent.
County Recorders should still be open during the State of Emergency but may have scaled back operations. Section 21 of HB 197 requires them to remain open for certain things. Most should still accept documents for recording by mail. This can be verified by calling the Recorder’s Office or checking websites for information about the services provided or suspended.
Jeffrey R. Appelbaum, Esq., a partner at Thompson Hine LLP, is the managing director of Project Management Consultants, LLC and partner/chairman of Construction Law Group.
John B. Kopf, Esq., is a partner at Thompson Hine LLP.
Stephanie Schmalz, Esq., is an associate at Thompson Hine LLP.
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Why Unsecured Creditor Committees Matter
—Tony Guerino, Esq., Elizabeth E. Klingensmith Esq., Matthew P. Ward, Esq.
- Committee selects legal counsel to recover debt.
- Legal counsel oversees the day-to-day management of the case.
- All committee expenses, including legal fees, are the responsibility of the bankruptcy estate.
One of the many unfortunate realities of the current economic situation is the likelihood of a sharp uptick in bankruptcies in the oil and gas industry. As more mid-size and large businesses begin to file Chapter 11 bankruptcy you will likely hear more about unsecured creditor committees. Guided by experienced legal counsel, these groups are critical for businesses seeking to recover what they are owed from the bankrupt company.
Creditor committees are assembled by the United States Trustee program, which is overseen by the Department of Justice. The Trustee will reach out to the largest unsecured creditors of the bankrupt company and offer a place on the committee. Typically, the committee is comprised of representatives from the seven companies with the largest unsecured debt claims against the bankrupt company. There must be at least three unsecured creditors willing to serve in order to form a committee.
If given this opportunity, it is most likely in your best interest to serve. This committee will select the legal counsel to represent all participating unsecured creditors. The committee’s legal counsel will oversee the day-to-day management of the case, while committees typically only meet a few times during the course of the bankruptcy and usually by teleconference. It’s important to note that all committee expenses, including legal fees, are the responsibility of the bankruptcy estate. Participating in the committee should cost you nothing. This is your opportunity to advocate for an attorney with experience you trust, which can be critical for recovering as much of what you are owed as possible.
For example, in 2014 a secured creditor offered to buy hybrid car manufacturer Fisker Automotive out of bankruptcy. Through the deal, the company’s unsecured creditors would have received a small fraction of what they were owed. The unsecured creditor committee fought the proposal and successfully argued for a competitive bidding process. Wanxiang Group bought the company with a winning bid of nearly $150 million, creating a pool of more than $40 million for the unsecured creditors.
The Fisker story is just one example but illustrates how important these committees are, particularly now. The experience of being involved in an unsecured creditor committee will prove invaluable when you put it to use on the next committee—a very likely scenario given the number of bankruptcies that are expected.
Tony Guerino, Esq., a partner at Womble Bond Dickinson, brings more than 20 years of experience in energy and environmental litigation involving oil exploration and production disputes. He has served as lead counsel in energy-related matters throughout the United States and major producing areas around the globe.
Elizabeth E. Klingensmith, Esq., is a partner at Womble Bond Dickinson and advises clients in Texas, Oklahoma and North Dakota in disputes arising from oil and gas leases and assignments, joint operations, joint accounting, mergers and acquisitions, preferential rights or areas of mutual interests, surface use accommodation and damages, oilfield services and equipment, seismic operations, equipment and pipeline failure, nuisance, quiet title, surface and subsurface trespass, hydraulic fracturing, mineral liens and theft of trade secrets.
Matthew P. Ward, Esq., is a partner at Womble Bond Dickinson. He is the leader of the Bankruptcy, Restructuring, and Creditors’ Rights practice group of Womble Bond Dickinson (US) LLP, and is the Office Managing Partner for the firm's Wilmington, Delaware office, and a member of the Firm Management Committee.
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