Consumers Face a Massive Credit Crunch; Lenders Are Still Figuring Out What to Do

Consumers Face a Massive Credit Crunch; Lenders Are Still Figuring Out What to Do

ABI Bankruptcy Brief

March 19, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

Consumers Face a Massive Credit Crunch; Lenders Are Still Figuring Out What to Do

U.S. consumers are facing what could become the biggest credit crunch since the Great Depression. Lenders and credit-reporting firms aren’t sure what to do about it, the Wall Street Journal reported. As the coronavirus spreads, thousands of wait staff, bartenders and airline employees are out of work and could be on the brink of missing payments on mortgages, credit cards and other loans. Lenders have yet to report a spike in missed payments, but the impact could be considerable. If borrowers start defaulting, they could lose homes and cars. In the longer term, those delinquencies could get factored into their credit reports, hurting their ability to borrow for many years. Some lenders already have announced programs that are meant to help. Citigroup, for example, is increasing spending limits for certain cardholders on a case-by-case basis, including those with rising out-of-pocket medical expenses. JPMorgan Chase & Co. is delaying due dates for some borrowers on cards, auto loans and mortgages. Goldman Sachs Group Inc. is allowing borrowers who have personal loans from its consumer bank, Marcus, to sign up to delay their payments for a month. Still, the expected economic slowdown could devastate many U.S. consumers, who already were overstretched before the coronavirus pandemic. Americans have been falling deeper into debt over the past decade as costs have climbed but incomes largely failed to keep pace. Consumer debt balances, including credit cards, auto loans and student loans, are at around record levels. (Subscription required.) 

Jobless Claims Rise Sharply at Front End of Expected Coronavirus Surge

The number of Americans applying for first-time unemployment benefits increased sharply last week, the front end of a surge in claims tied to the new coronavirus pandemic, the Wall Street Journal reported. Initial jobless claims increased by 70,000 in the week ended March 14 to a seasonally adjusted 281,000. This is the highest level for jobless claims since September 2017, following Hurricane Harvey, which struck the U.S. and disrupted business activity. The survey period for today’s Labor Department release was before many states started reporting higher numbers of jobless claims this week related to business closures due to the coronavirus. Still, a number of states specifically cited coronavirus-related layoffs last week, the report said. Many states have reported higher layoffs in services industries, particularly restaurants. Ohio’s three-day total for jobless claims through Tuesday was 78,000, compared with about 3,000 for the same period last week. Connecticut filers have submitted more than 30,000 new claims since Monday, compared with just 2,500 all last week. The state-level figures signal that U.S. jobless claims, a proxy for layoffs, are slated for a potentially unprecedented rise in next Thursday’s Labor Department report on claims, after remaining historically low at the start of the coronavirus outbreak. (Subscription required.)


 

In related news, the coronavirus pandemic is devastating global travel, causing business to evaporate and forcing companies to slash payroll in what’s shaping up to be the biggest test the modern travel industry has ever faced, the Wall Street Journal reported. Longer term, the crisis could permanently reshape attitudes toward travel, fundamentally changing the landscape for hotels, airlines and cruise companies, and the millions of smaller businesses that make up the industry. No corner of the industry, market or region of the world has been spared. In the U.S. alone, hundreds of hotels are preparing to shut down this week, and cruise ships and jets are idled. Tuesday, Marriott International Inc., the world’s largest hotel company, considered a bellwether for the industry with nearly 1.4 million rooms worldwide, said it is starting to furlough what it expects will be tens of thousands of employees as it ramps up hotel closings. United Airlines Holdings Inc. is grounding half its planes, and expects the ones that fly will be just a quarter full. Companies including Hilton Worldwide Holdings Inc. have pulled their 2020 earnings guidance after the disruption made it impossible to forecast. Hilton told employees on Tuesday it would suspend operations at the Capital Hilton in Washington, D.C., and the New York Hilton Midtown, which combined have about 2,400 rooms, according to a person familiar with the situation. (Subscription required.)

Additionally, the coronavirus pandemic is exposing the fragile situations of gig economy workers: the Uber and Lyft drivers, food-delivery couriers and TaskRabbit furniture builders who are behind the convenience-as-a-service apps that are now part of everyday life, the New York Times reported. Classified as freelancers and not full-time employees, these workers have few protections like guaranteed wages, sick pay and health care, which are benefits that are critical in a crisis. While gig economy companies like Uber and DoorDash have promoted themselves as providing flexible work that can be lifelines to workers during economic downturns, interviews with 20 ride-hailing drivers and food-delivery couriers in Europe and the U.S. over the past week showed that the services have been anything but that. Instead, as the fallout from the coronavirus spreads, gig workers’ earnings have plummeted and many have become disgruntled about their lack of health care. Many others are also feeling economic pain from the outbreak — layoffs have hit workers in retailing, airlines, hotels, restaurants and gyms — but even as public health agencies have recommended social isolation to insulate people from the virus, gig workers must continue interacting with others to pay their bills. “They’ve got no social insurance at all,” said Sen. Mark Warner (D-Va.), who has proposed federal legislation to provide benefits for the estimated 15 million Americans who depend on gig-economy jobs as their primary source of income. In recent weeks, some gig-economy companies have responded by offering basic sick leave provisions and cleaning products like hand sanitizer for drivers. Uber, Lyft, Instacart and DoorDash said that they would pay workers for 14 days of work if they have a coronavirus diagnosis and need to stay home.



Junk Debt Market Freeze Risks $35 Billion Banker Headache

Banks that agreed to help private-equity firms and highly leveraged companies fund recent acquisitions may have to come up with billions of dollars of their own cash to finance the deals if the market for risky debt remains shut, Bloomberg Law reported. Underwriters across Wall Street have committed to providing more than $30 billion to junk-rated companies by mid-year. But with the markets for leveraged loans and high-yield bonds having virtually shut down since the COVID-19 pandemic triggered fears of a global recession, the banks now face the prospect that they might not be able to offload the risk before the takeovers are scheduled to close. “The problem is what is the market going to look like three or four months from now,” said Grant Moyer, head of leveraged capital markets at Mitsubishi UFJ Financial Group Inc. “Banks have very little on their balance sheet[s] and will be willing to fund loans that need to close rather than move them at any price.” The exposure is a small fraction of the commitments they held heading into the 2008 financial crisis. Still, it could force banks to take losses or tie up capital for months just as dozens of companies are drawing credit lines or seeking fresh financing to cope with the coronavirus fallout. The deals run the gamut of sectors and geographies, ranging from an $11 billion financing for the leveraged buyout of Thyssen Krupp’s elevator unit in Europe to a $500 million debt deal for Culligan’s acquisition of water-filtration company Aqua Venture.

Cities Reel from Hammer Blows of Sports, Events Going Dark

City and state officials across the U.S. are confronting the sweeping economic toll wrought by the COVID-19, which has emptied stadiums, arenas, hotels, restaurants and other businesses that just a few weeks ago were bustling, Bloomberg News reported. Concerts and tours have been canceled, along with New York’s Broadway shows. Major League Baseball, the National Basketball Association and the National Hockey League last week suspended operations, and the NCAA canceled all spring championship events. Major sporting events can provide large infusions of tax revenue for host cities. The city of Omaha, Neb., has seen its three biggest events of the year — the NCAA basketball tournament, College World Series baseball tournament and Berkshire Hathaway’s annual meeting — canceled within the past week. Those events have a combined economic impact of roughly $100 million for the city, an estimated $5 million to $10 million of which is city tax revenue, said Stephen Curtiss, the city’s finance director. Event-related tax revenues account for 1%-1.5% of the city’s general fund, a loss he said pales in comparison to the hotels, restaurants and other businesses that have closed or limited operations after federal officials urged people to avoid gatherings of 10 or more people. Nearly $9 billion in tax-free municipal bonds has been issued to finance sports stadiums and arenas that could remain empty for months due to the virus, nearly half of them in New York and Florida, according to Bloomberg Intelligence.

USTP Notice on In-Person 341 Meetings

The U.S. Trustee Program announced on Monday that effective immediately, all in-person chapter 7, 12 and 13 § 341 meetings scheduled through April 10 are continued until a later date to be determined. Absent special circumstances, § 341 meetings may not proceed during this period except through telephonic or other alternative means not requiring personal appearance by debtors. Appropriate notice will be provided to parties in accordance with bankruptcy law and rules. Meetings already noticed as telephonic meetings may proceed as scheduled. For more information, please click here.

IRS Issues Guidance on Tax Payment Deferrals, Confirms that Tax Filing Due Dates Have Not Been Extended

As the number of confirmed cases of COVID-19 continues to increase in the U.S., the federal government is taking action to reduce the impact on taxpayers. Specifically, the Internal Revenue Service (IRS) has officially announced that the due date for making tax payments has been pushed to July 15, 2020. According to the guidance, President Trump's emergency declaration on March 13 instructed the Secretary of the Treasury “to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 U.S.C. 7508A(a).” As a result of the Emergency Declaration, any person with a federal income tax payment due April 15, 2020 (the normal tax filing season due date), is eligible for relief. That means that the due date of April 15 for making federal income tax payments has been postponed to July 15, 2020. Interest, penalties and additions to tax will accrue on taxes in excess of the amounts due but not paid by April 15, 2020. The relief also does not apply to the filing of any tax return or information return. In other words, filing dates are not extended. The official deadline for filing your individual federal income tax returns remains April 15.

Pick Up Your Copy of Pre-Bankruptcy Planning for the Commercial Reorganization
 
Thomas J. Salerno, along with a team of writers from Stinson LLP, has updated Pre-Bankruptcy Planning for the Commercial Reorganization. As the authors note in this third edition of the popular title, “Pre-bankruptcy planning for the commercial chapter 11 reorganization can be broken down conceptually into four distinct (although interrelated) categories, which are set forth in no particular order of priority: (1) preparation of management, key employees and exit strategy; (2) business preparation; (3) legal preparation; and (4) tax preparation.” This update is an invaluable guide for CFOs, General Counsel, and tax advisors, as well as, of course, for practitioners who represent them in going through a reorganization. Pre-Bankruptcy Planning is available at store.abi.org (remember to log in with your ABI credentials to secure member pricing).

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