Protecting Profit in Anticipation of Bankruptcy

“We seem to have a crisis a week and now the crisis is the risk of bankruptcy of the big three auto companies,” said Bruce Nathan, partner at Lowenstein Sandler PC. “There’s lots of turmoil, credit is gone as a result of the Lehman Brothers filing, the credit markets are pretty much dried up. There is no funding that’s available to restructure a lot of these distressed companies and this has led to a large increase in bankruptcy filings.”

In short, Nathan illustrated that when it comes to trade creditors looking to protect their company’s profit from insolvent customers, a teleconference such as his couldn’t have come soon enough. “This teleconference could not have been scheduled at a more appropriate time because we’re trying to protect ourselves,” he said.

Attendees got a chance to bask in Nathan’s always-enthusiastic expertise regarding the ways creditors can protect themselves in the case of a customer’s bankruptcy. First, Nathan noted, it’s important that creditors know where they can get information pertaining to their case. “There’s a lot of public information out there to see if your customer is financially distressed,” he said, adding that, in some instances, this information could easily be used to predict a customer’s future. “There’s a lot of information that you could be looking at that could predict bankruptcy a year from now. Whether it’s ratings, information you could get from your credit group, a credit check, these publications will predict the bankruptcy a year or two before the actual bankruptcy.”

By leveraging this information and spotting any troubled company warning signs, credit professionals can make sure they act soon enough to protect their company’s investment in a customer, ensuring their payment long before receiving a word of a bankruptcy filing. “The warning signals that you should be looking at, once you get them, should prompt you to take action to protect yourself and try to obtain some sort of security,” said Nathan, who used the majority of his presentation discussing the many ways creditor companies can secure their investments prior to customer filing, including their advantages, disadvantages and legal requisites. “These credit enhancements increase the likelihood of you being paid on your claim when you have a customer who is on the path to bankruptcy, but not there yet.”

Nathan went into detail about credit enhancements like letters of credit, security interests, guaranties, put agreements and many more.

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