Corporate bankruptcy filings could fall to lowest monthly total in almost 4 years
Business bankruptcy filings fell to an almost four-year low in May as struggling businesses overcome their woes amid the broader economic recovery from the pandemic.
In May, 27 new business bankruptcy cases were filed, the lowest monthly total since July 2017. As of May 31, the cumulative total for the year was 210 cases, a figure lower than all but two of the 11 previous years – 2015 and 2014.
Despite the continued decline in new bankruptcies so far in 2021, some experts continue to question whether government support and easy access to capital will prevent struggling companies from going to court, or whether another spike will occur soon.
“You can’t stop the box forever,” said Robert Hirsh, partner in the bankruptcy and restructuring department at Lowenstein Sandler LLP.
“You are not running in bankruptcy court”
The slowdown follows an increase in bankruptcies in 2020, as struggling businesses are further shaken by the COVID-19 pandemic. Experts said government support and hot capital markets have kept at bay what would otherwise have been a continued surge in deposits in 2021. Temporary restrictions in the event of a pandemic have also made it difficult to know the true health of people. troubled businesses, and lenders have become more flexible as a result. .
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The amount of money raised from troubled funds – hedge funds and private equity funds that target distressed companies for potential investment returns – at the onset of the pandemic also helps prevent companies from filing for bankruptcy, said Lucy Kweskin, partner in Mayer Brown’s global restructuring practice.
“If you’re able to lower the interest rate on your debt and push back the maturities and do all kinds of things, you’re not going to bankruptcy court,” Kweskin said.
A larger challenge for struggling investors is the weird behavior of the markets in 2021 – valuations have jumped and even companies that might not deserve such high market values are able to obtain funding in different ways, a Kweskin said. The pandemic’s elimination of the bankruptcy pipeline and the availability of capital suggest that the current pace of deposits is unlikely to change, Kweskin said.
More and more companies are restructuring outside the bankruptcy process, according to Vincent Indelicato, restructuring partner at Proskauer Rose LLP. An unprecedented opportunity to access cash along with more flexible loan terms has prompted companies to try and find solutions other than going to court, Indelicato said.
“As long as the capital markets continue to indicate an appetite for yield, I think companies will continue to try to exploit the markets for solutions, again, without having to seek Chapter 11,” he said. Indelicato said in an interview.
“Only gonna last so long”
Federal stimulus funds, including the Paycheck Protection Program, and last-minute refinancing have helped companies stay afloat that would otherwise have to go bankrupt, said Hirsh of Lowenstein Sandler. Additionally, the private equity firms that fund many companies don’t want those companies to default during the pandemic, according to Hirsh.
“They give short term solutions like refinancing, but it will only last that long,” Hirsh said.
Markets are also watching closely for signals that the Federal Reserve will begin to reduce its continued support to the economy or raise interest rates by almost 0%. The central bank’s $ 120 billion in monthly asset purchases have proven to be a boon to stocks since the program began shortly after the start of the pandemic. Low interest rates also support a bull market.
The S&P 500 has recovered from an initial decline at the start of the pandemic’s emergence in the West and is nearly 31% higher than it was on January 1, 2020.
Companies in sectors that have weathered the worst effects of the pandemic so far, however, may not be so lucky, experts say. Many sectors, including the hospitality industry, may not experience many bankruptcies before the end of 2022, according to Hirsh. Consumer discretionary businesses like restaurants and department stores that have been hit hard by pandemic-related closures have continued to face risks.
Even though bankruptcy filings remain slow throughout 2021, they could resume later this year, according to Joseph Malfitano, founder and managing member of Malfitano Partners. There could be an increased need for courts if capital markets start to tighten, Malfitano mentionned.
“We expect significant fallout after Christmas in retail in particular,” Malfitano said in an email.
Many retailers filed for bankruptcy in 2020, and some companies are still finding their place after the pandemic accelerated shifts in consumer preferences and technological shifts in the industry, said L. Katherine Good, partner at Potter Anderson Corroon LLP, in an interview. Supply chain issues have hit the auto industry, while healthcare companies have struggled as many elective proceedings canceled during the pandemic and government support come to an end.
“They may not be in the best position to deal with another negative effect right now,” Good said.
Editor’s Note: This Data Dispatch is updated on a monthly basis and the latest edition was released on May 12th.
Bankruptcy figures include public companies or private companies with public debt with a minimum of $ 2 million in assets or liabilities at the time of filing, in addition to private companies with at least $ 10 million in assets. or liabilities. Market Intelligence may remove companies from this list if it finds that their total assets and liabilities do not meet the threshold required for inclusion.
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