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Managing Through the Liquidity and Solvency Crises Resulting from the COVID-19 Pandemic

By Mike Kennelly, Gene L. Deetz, Vikram Kapoor

April 16, 2020

Industries across the globe are bracing for the impact from the COVID-19 pandemic, which will undoubtedly increase the volume and complexity of liquidity issues, solvency concerns, disputes, business risks, and regulatory challenges.

Our experts guided companies and investment funds through the 2007-2008 credit crisis by structuring strategies to solve liquidity and valuation issues, as well as effectively resolve complex litigation that occurred thereafter. The COVID-19 pandemic will spawn myriad issues around business challenges, as well as the need to protect against future risks, and comply with new and existing regulations. Despite aggressive action by the United States Federal Reserve and Congress to create business and consumer liquidity, we expect the economic recovery to include issues with regard to:

  • Solvency
  • Illiquidity and valuation of complex financial products and other illiquid securities
  • Hedge, private equity, and venture capital fund crisis management
  • Impending or just concluded transactions
  • Professional liability issues for professional services firms providing financial, investment, or accounting advice

Issues to Address

Ask yourself the following questions as you consider potential impacts to your business:

  1. Are you facing margin calls or mandatory capital requirements?
  2. Are you facing challenges in properly valuing investments for financial reporting purposes?
  3. Are you concerned about the impact current events may have on existing contingent liabilities or exposure to new ones?
  4. Will current events create the need to reassess your solvency and ability to pay liabilities, including contingent liabilities?
  5. Have you considered how to restructure your portfolio to meet investor redemptions?
  6. Has your counterparty closed out derivative transactions?
  7. Are you the buyer or seller of a business with potential exposure to litigation stemming from material adverse change clauses?
  8. Do you anticipate the current events will bring increased scrutiny to the professional services you provide?
  9. Have you considered the potential need for assistance with internal investigations or regulatory inquiries?
  10. Are you invested in illiquid securities with counter-indicated returns and integrity issues such as potential Ponzi schemes?

How We Can Help:

Our expert and advisory teams develop sound and compelling analysis, opinions, and solutions enhanced by leading technology tools and delivered by credible and credentialed experts. Our findings are delivered in a clear and concise manner and when required, presented through experienced testimony before tribunals around the world. Our experience allows us to help respond to challenges we anticipate resulting from the COVID-19 pandemic, including:

  1. Structured financial products and other illiquid securities for:
    • Margin call/mandatory capital requirements
    • Lender negotiation and transparency in forbearance discussions
    • Fair value analysis to properly mark holdings for financial reporting purposes
    • Portfolio restructuring to meet liquidation and redemption requirements
    • Close out of derivatives contracts
    • Impact of downturn in commercial and residential real estate values and leveraged loans
  2. Financial institution capital and risk weighting exposure requirements from regulators
  3. Solvency analysis and analysis of contingent liabilities
  4. Underlying leveraged loans ability to pay
  5. Damage analysis, including material adverse change litigation
  6. Government loan programs
    • Accessing government liquidity programs offered by federal stimulus initiatives
    • Monitoring compliance with programs
  7. Professional liability issues related to advice provided in uncertain times for audit firms, valuation advisors, due diligence advisors, asset managers, and indentured trustees
  8. Investigations of financial products/operators with counter-indicated values and returns, and integrity issues such as potential Ponzi schemes