The first two weeks after a customer filing are critical
A recent bankruptcy filing of Toys "R" Us shows the company has over $200 million dollars of payables and $5 billion of long-term debt. A large portion of which was acquired when the company went private through a leveraged buyout by marquee firms like KKR and Bain. At the time, Toys "R" Us was the go-to-place for toys and the weekend destination goal of kids across America. The company even acquired the famed Fao Schwarz and rebranded the store made world-famous by Tom Hanks in the movie Big. The long-term debt is not the primary concern for companies in the freight and logistics space, as the exposure that any freight company would have is related to its payables for services rendered (i.e. transportation of freight).
When a major retailer such as Toys “R” Us files for bankruptcy, a long line of creditors comes knocking. Trucking companies, especially smaller carriers and owner-operators, are often at the end of that line – the so-called unsecured creditors. The same story happens daily across North America; it may not be a retailer with the visibility of Toys “R” Us, but it may the primary customer for a trucking company.
If any shipper files for bankruptcy, how do carriers and owner-operators survive if the influx of cash has stopped? Well, contrary to popular belief, carriers can still get paid – if they know what to do when a customer files for bankruptcy.
“The principles are the same regardless of the size you are,” George Thorson, COO of Triumph Business Capital, explains. “Even in the biggest carriers, the credit managers are concerned” when a customer files bankruptcy.
Once a carrier learns of a customer bankruptcy, Thorson advises they seek “critical vendor status.” This status is granted by the bankruptcy court judge to suppliers deemed critical to continued operations of the affected business. It operates under the “doctrine of necessity.”
“First day motions accompanying a chapter 11 debtor’s bankruptcy petition, particularly in bankruptcy mega-cases involving large retail chains, routinely include an application for authority to pay the pre-bankruptcy claims of vendors and other creditors without whom the debtor could not continue to operate its business,” explains the law firm Jones Day.
In essence, Thorson says, getting your carrier critical vendor status can help ensure you will get your money ahead of unsecured creditors.
“Maybe you have $50,000 in [accounts receivable] and if you don’t do anything, you may have to wait 9 months or more to get anything, maybe even only pennies on the dollar,” he says. But getting critical vendor status moves a carrier to the front of the line for payments – even during the ongoing bankruptcy proceedings.
There is a catch, though. To achieve this status, the carrier must extend the same level of credit and terms as before the bankruptcy – basically the carrier needs to extend a line of credit. Being a critical vendor will greatly increase the chances you will get all the money you are owed – not just a share of the remaining cash that is divided among unsecured creditors.
“If you get the critical vendor status and you have a load for $3,000, you get the $3,000 because nobody else but critical vendors are getting paid,” Thorson says.
Even if you are not granted critical vendor status, there are other steps you must take to recoup any money. The most important is to file an “administrative claim.” Any debt occurring under an administrative claim post-bankruptcy will have a higher claim status, increasing the chances you will see your money.
If you are one of the 10 or 20 biggest creditors and did not get critical vendor status, though, there is another avenue you can take.
“You should try to get on the unsecured creditor’s committee,” Thorson advises. “This committee meets with the owners and is allowed to asked questions of the owners under oath. The committee also gets to vote on [some restructuring plans] and can help the company keep costs down.”
The unsecured creditor’s committee gives creditors a voice in the proceedings and can influence how the bankrupt company spends its money.
You need to also file a “proof of claim” form if you want to receive any money. Forms are available online. Thorson says not to wait to file this paperwork as there are deadlines to file and any claim not filed in time will be denied.
If one of your customers files bankruptcy, you should be notified by the court, but you can also look for signs of trouble beforehand. If you are not being paid or having trouble getting your money, that could be an indication of potential problems. Thorson also advises setting up a Google Alert so you get notified if the company shows up in any news stories.
Unfortunately, the step many carriers choose in a bankruptcy situation is to wait and hope you get paid. You may not end up with any of the money owed to you when the bankruptcy is settled – either through a reorganization or a Chapter 7 (dissolving of the business) filing.
If you hold a claim, Thorson says to expect to be contacted by a “claims buyer.” These are people who will offer to purchase your claim at a discount - betting that they will be able to make money when the claim settles for a higher price. For instance, a claims buyer may offer 25 cents for every dollar of claim, hoping you will choose to take the sure cash. The hope is that the company will eventually pay 50 cents per dollar.
“If I’m a carrier or a broker, I have to make a choice to wait [the bankruptcy] out and maybe get 100 cents on the dollar or do I look to sell my claim,” Thorson says. “If you want low money, cheap money, fast money, you do it. But most of the time, it’s not in your best interests to do that. Claims buyers are trying to make a substantial amount of money and they would not offer [to buy your claims] if they didn’t think they were going to make a lot of money.”
For a carrier whose customer has filed bankruptcy, the stress level rises exponentially. Cash may be tight for a while, and you may even need an influx of cash to keep paying the bills. While you may not be able to prevent your customers from filing bankruptcy, you can reduce some of the exposure on your side.
Start by being proactive. If you are a large enough carrier, diversify your shippers so the loss of one shipper does not affect the long-term viability of your carrier. Second, research and learn about your customers both before you do business with them and throughout your business relationship.
Thorson says that is the precise reason factoring companies came into being.
“That’s the way factoring is today in the U.S.,” he notes. “It’s a credit service. It’s the factor that would take the risk.”
One final consideration for carriers is credit insurance, but most insurers want to insure all a company’s accounts receivables, not just the risky ones, Thorson advises.
A customer filing bankruptcy doesn’t have to be the financial death knell for carriers and owner-operators that it was years ago, as long as certain steps are taken to protect your interests.