July 28, 2020 - Since the start of the Coronavirus pandemic, there has been a steady stream of new Chapter 11 filings, particularly in the retail space and among small businesses.  In response, some members of Congress have introduced legislation that, while well-intentioned, could have negative and unintended consequences for the loan market.  In late June, Senate Democratic Whip Dick Durbin (D. IL), together with Chairman of the House Judiciary Committee Jerold Nagler (D. NY) introduced the “Protecting Employees and Retirees in Business Bankruptcies Act of 2020” (PERBBA) whose stated goal is to protect workers’ rights in corporate bankruptcies and make it more difficult for companies to reject collective bargaining agreements.  While the goals of the bill seem noble, the bill would likely result in secured credit becoming more expensive and make it much more difficult for bankrupt debtors to successfully reorganize or sell their underlying assets to more sound owners.

Specifically, the bill proposes to increase to $20,000 (from $13,650) the amount of prepetition wages and compensation entitled to priority treatment per employee, increase to $20,000 the amount per covered employee benefit plan, and allow priority treatment of any claims under the WARN act, as well as for severance pay and employee benefit contributions that are due post-petition.  The bill would also make it more difficult to reject collective bargaining agreements and reduce employee benefits, and require the bankruptcy court to give substantial weight to the preservation of jobs when considering Section 363 asset sales.

Will such legislation actually work?  There is certainly no consensus that subjectively prioritizing employee claims or keeping in place unworkable agreements will produce actual benefits for workers.  Requiring debtors, as a matter of law, to maintain employment structures that may have contributed to the demise of the companies in the first place will make it difficult for them to attract buyers or the capital needed to reorganize.  Moreover, subjectively favoring a subset of unsecured claims in bankruptcy over the claims of secured creditors would theoretically increase the costs of all secured loans since doing so will necessarily reduce the returns given default on senior loans.

The PERBBA has been introduced several times over the years, first in 2007 and as recently as 2017, but has never gained a significant consensus.  While it is still unlikely that the bill will move in the current Congress, it could attract more support depending on how big the wave of bankruptcies becomes in the coming months.  The LSTA will continue to follow this legislation closely.

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