Potential Wave of U.S. Bankruptcies Draws Nearer as Corporate Distress Spreads
Potential Wave of U.S. Bankruptcies Draws Nearer as Corporate Distress Spreads
ABI Bankruptcy Brief
May 7, 2020
NEWS AND ANALYSIS
Potential Wave of U.S. Bankruptcies Draws Nearer as Corporate Distress Spreads
For many troubled companies, like luxury retailer Neiman Marcus Group Inc., which filed today, the lockdown to blunt the COVID-19 coronavirus super-charged the effects of pre-existing problems like debt overloads and the inability to please fickle consumers. For others, the debt they rack up while the pandemic rages may prove insurmountable once the health threat is over, Bloomberg News reported. “Everyone’s distressed watch list has become so big that it doesn’t even make sense to call it a watch list — it’s everyone,” said Derek Pitts, head of debt advisory and restructuring at PJ Solomon, which tracks the financial well-being of hundreds of companies. Here’s a sampling: The amount of debt classified as distressed in the U.S. surged 161 percent in just the last two months to more than half a trillion dollars. In April, corporate borrowers defaulted on $35.7 billion of bonds and loans, the fifth-largest monthly volume on record, according to JPMorgan Chase & Co. So far in 2020, the pace of corporate bankruptcy filings in the U.S. has already surpassed every year since 2009, the aftermath of the global financial crisis, Bloomberg data show. Even the bankruptcy process has been complicated by the virus, with social distancing making it impossible for companies to conduct asset sales that may keep them in operation and save jobs. “Many companies aren’t paying rent or vendors either right now, so they’re just accumulating liabilities to deal with later,” said Perry Mandarino, head of restructuring and co-head of investment banking at B. Riley FBR Inc. “There’s a large universe of companies that have been massively affected by COVID-19, and it’s unclear whether the slope of recovery will be fast enough for them to avoid bankruptcy,” said Mo Meghji, founder and CEO of restructuring adviser M-III Partners. “The debt they are taking on now will put that much more pressure on their finances going forward.”
In related news, Fitch Ratings said that the coronavirus-triggered downturn is pushing default rates higher and is also affecting the bankruptcy procedures used to address such credit defaults. Several recent debtors have had their bankruptcy cases derailed as ability to access exit financing markets has been compromised, according to Fitch. Similarly, decreased lender appetite for equitized debt, as well as a lack of third-party interest in certain distressed assets, has also disrupted the streamlined trend of pre-coronavirus chapter 11s. Lender fears with respect to DIP facilities, as well as an increased frequency of liquidation outcomes, will likely further impede the goal of preserving value in U.S. bankruptcies during the crisis. Given that recoveries are tied to distributable value, Fitch said that a prolonged pandemic may contribute to lower creditor recoveries for debtors with disrupted processes.
Commentary: Planning for an American Bankruptcy Epidemic*
The COVID-19 pandemic looks likely to cause the biggest surge in bankruptcies that the U.S.’s court system has ever experienced. Without an immediate increase in judicial capacity to manage the coming flood of cases, an even larger economic disaster awaits, according to a commentary in the Project Syndicate by Profs. Mark Roe of Harvard Law School and Ben Iverson of Brigham Young University. If bankruptcies surge as they did following the 2008-10 financial crisis, then, based on how long it takes to handle each case, Roe and Iverson calculate that a U.S. bankruptcy judge would have to work close to 50 hours per week to keep up with the increased caseload. In fact, the economy is already contracting more sharply than during the 2008 financial collapse, suggesting that a bankruptcy surge at double the 2010 rate is plausible, according to the commentary. Even if only a minuscule 0.9% of the 30 million newly unemployed filed for bankruptcy, the bankruptcy caseload would exceed the 2010 peak. Government support under the Coronavirus Aid, Relief, and Economic Security (CARES) Act will prevent some immediate bankruptcies. But many businesses still will struggle to meet their obligations to creditors, employees and suppliers, and then, like Neiman Marcus, J.C. Penney and much of the oil industry, they still will be unable to pay their debts. Clogged bankruptcy courts will have a negative feedback effect on the economy. Furthermore, some bankruptcy decisions must be made almost immediately, so that businesses can get and keep enough cash to stay alive through their next payroll. Roe and Iverson propose that Congress double the number of available bankruptcy judges and support personnel. In particular, legislators should create new, temporary judgeships, redeploying other federal judges and moving bankruptcy judges in less busy courts to places where they are most needed.
*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.
Unemployment Claims Data Point to Record Wave of Job Loss
U.S. workers have filed nearly 33.5 million applications for unemployment benefits in the seven weeks since closures were put in place to combat the coronavirus pandemic, showing a wave of layoffs that likely pushed April job losses to record levels, the Wall Street Journal reported. U.S. workers filed 3.2 million jobless claims last week, the Labor Department said. It was the fewest since the week ended March 14, before the pandemic caused claims to spike, but still 15 times early March readings. Recent layoffs are expected to cause nonfarm payrolls to fall by 21.5 million and the unemployment rate to climb to 16 percent in the April jobs report, which will be released on Friday, according to economists surveyed by The Wall Street Journal. Both numbers would be highs on records made in the late 1930s and 40s. The previous peak unemployment rate was 10.8 percent in 1982. The largest monthly jobs loss, 1.96 million, occurred at the end of World War II.
Airlines Seek Relief from Flying Near-Empty Planes as Passenger Numbers Hit Lowest Since the 1950s Amid Virus
A lobbying group representing U.S. airlines yesterday said that federally mandated minimum service requirements are “unsustainable” for carriers as the COVID-19 pandemic sends passenger numbers to the lowest levels since the 1950s, CNBC.com reported. One of the requirements to receive portions of $25 billion in federal payroll grants and loans under the coronavirus rescue package is that airlines have to keep a certain number of flights, which varies by carrier and is based on networks established before the disease became widespread. The Department of Transportation has issued some waivers, but Nicholas Calio, president and CEO of Airlines for America, which represents Delta, American, United, Southwest, JetBlue, Alaska and Hawaiian, said in prepared testimony ahead of a Senate hearing that “the cost associated with operating nearly empty flights to communities with little to no demand significantly exacerbates air carrier liquidity.” Airlines are among the industries hardest hit by the coronavirus and the shelter-in-place orders. They have parked about half of their planes and cut thousands of flights to try to save money, but are already posting their first quarterly losses in years. The industry group estimates that U.S. airlines are burning about $10 billion of cash a month. Airlines aren’t currently planning to seek additional federal aid to weather the coronavirus, Calio told lawmakers. U.S. air travel demand dropped 96 percent in April to the lowest levels since before the jet age, according to A4A. The Department of Transportation last month warned airlines that they are obligated to give cash refunds when the carrier is the one canceling the flight. Airlines can still provide travel credits if a passenger doesn’t want to fly but the airline is still operating the flight.
In related news, airlines and airports must adopt even more measures against the spread of COVID-19, some of which would imply major new costs for an industry already suffering steep losses, a public health expert will tell lawmakers, Bloomberg News reported. Passengers should be screened for elevated temperatures, and all employees should be required to wear masks and gloves, according to testimony prepared for a Senate hearing by Hilary Godwin, dean of the University of Washington’s School of Public Health. In-flight seating, she said, must be arranged so that people aren’t too close together, and airports have to be reshaped to promote social distancing. The air-travel industry and government agencies overseeing it must allow public health considerations to “play a far greater role than before this pandemic,” Godwin said. She is among four witnesses who appeared this week before the Senate Commerce Committee in a hearing on the state of the airline industry during the coronavirus pandemic. Industry officials echoed some of Godwin’s concerns, according to their testimony, in some cases calling on the federal government to create new guidelines and standards to protect passengers and to help restore public confidence in the reeling air-transportation sector.
Most States that Are Reopening Fail to Meet White House Guidelines
More than half of U.S. states have begun to reopen their economies or plan to do so soon. But most fail to meet criteria recommended by the Trump administration to resume business and social activities, the New York Times reported. The White House’s guidelines are nonbinding and ultimately leave states’ fates to governors. The criteria suggest that states should have a “downward trajectory” of either documented coronavirus cases or of the percentage of positive tests. Public health experts expressed criticism because “downward trajectory” was not defined and the metrics do not specify a threshold for case numbers or positive rates. Still, most states that are reopening fail to adhere to even those recommendations: In more than half of states easing restrictions, case counts are trending upward, positive test results are rising, or both, raising concerns among public health experts.
As Businesses Reopen, Lawsuits Loom over COVID-19 Exposure
As businesses reopen during the COVID-19 pandemic, tort reformers are mobilizing to enact federal and state protections against an anticipated plethora of personal-injury lawsuits, but plaintiffs attorneys vow on suing companies that negligently expose customers and employees, Law.com reported. The battle, so far, is playing out in Washington, D.C., where Senate Majority Leader Mitch McConnell (R-Ky.) has said that the next COVID-19 stimulus package would include liability protections, a move opposed by Democrats. More than 100 plaintiffs organizations, including the American Association for Justice, said in an April 29 letter to Congress that they “strongly oppose” legislation that would give “nationwide immunity for businesses that operate in an unreasonably unsafe manner, causing returning workers and consumers to risk COVID-19 infection.” The concerns are hitting Main Street as some restaurants, movie theaters, and other businesses have reopened in certain states, including Georgia and Texas. “The level of concern is widespread across the business community in terms of the emerging liability issues,” said Harold Kim, president of the U.S. Chamber’s Institute for Legal Reform. It is no veiled threat, given that companies such as Princess Cruise Lines, Walmart, and at least three elderly care facilities already face wrongful death lawsuits. Public Justice has sued Smithfield Foods for allegedly creating a public nuisance by failing to protect its workers at a pork processing plant in Missouri.
Analysis: Push for Profits Left Nursing Homes Struggling to Provide Care
When the pandemic struck, the majority of the nation’s nursing homes were losing money, some were falling into disrepair, and others were struggling to attract new occupants, leaving many of them ill equipped to protect workers and residents as the coronavirus raged through their properties, the New York Times reported. Their troubled state was years in the making. Decades of ownership by private equity and other private investment firms left many nursing homes with staggering bills and razor-thin margins, while competition from home care attendants and assisted-living facilities further gutted their business. Even so, many of their owners still found creative ways to wring profits out of them, according to an analysis of federal and state data by the New York Times. In many cases, investors created new companies to hold the real estate assets because the buildings were more valuable than the businesses themselves, especially with fewer nursing homes being built. Sometimes, investors would buy a nursing home from an operator only to lease back the building and charge the operator hefty management and consulting fees. Investors also pushed nursing homes to buy ambulance transports, drugs, ventilators and other products or services at above-market rates from other companies they owned. These strategies paid off handsomely for investors, but they forced nursing homes to skimp on quality. For instance, for-profit nursing homes — roughly 70 percent of the country’s 15,400 nursing homes and often owned by private investors — disproportionately lag behind their nonprofit counterparts across a broad array of measures for quality, the Times found. Also, they are cited for violations at a higher rate than nonprofit facilities.
ABI’s COVID-19 Resources Website Updated with New Content to Help Bankruptcy Pros Navigate the Financial Crisis Resulting from the Pandemic
ABI’s new COVID-19 Resources website for bankruptcy professionals and the public is continually being updated with essential information and analysis regarding the financial distress being inflicted by the COVID-19 pandemic. The site features exclusive ABI content on the crisis, recommended member analysis, industry sector news, charts and more. Click here to access the site, and be sure to bookmark the page so you can easily check back for regular updates!
Miss Recent abiLIVE Webinars Examining Trading in the Secondary Credit Markets, Litigation Finance or Subchapter V for Small Businesses? Visit ABI’s eLearning Site!
Recent abiLIVE webinars provided a look at key issues for practitioners amid the economic downturn due to the COVID-19 pandemic. Replays are available for purchase on ABI’s eLearning website:
• Hosted by ABI’s Claims Trading Committee, the “Trading in the Secondary Credit Markets: When Am I Bound?” webinar features attorney Richard Corbi (New York) moderating a panel including David Daniels of Richards Kibbe Orbe (Washington, D.C.), Jennifer Pastarnack of Sullivan and Worcester (New York) and Amanda Segal of Katten (New York). Click here to purchase the replay.
• The “Litigation Finance: Lessons from the Last Financial Crisis for the COVID-19 Downturn” webinar features Eric Fisher of Binder & Schwartz (New York), Marc Kirschner of Goldin Associates, LLC (New York), Cathy Reece of Fennemore Craig PC (Phoenix, Ariz.) and Emily Slater of Burford Capital (New York). Click here to purchase the replay.
• Today, ABI’s Consumer Bankruptcy Committee hosted the “Understanding the Nuts and Bolts of ‘New’ Subchapter V Small Business Chapter 11” webinar featuring Committee Co-Chair Jon Lieberman of Sottile & Barile (Loveland, Ohio) moderating a panel including James B. Bailey of Bradley Arant Boult Cummings LLP (Birmingham, Ala.), Bankruptcy Judge Paul W. Bonapfel (N.D. Ga.; Atlanta) and Judith Greenstone Miller of Jaffe Raitt Heuer & Weiss, P.C. (Southfield, Mich.). Click here to purchase a replay.
Need to update your chapter 12 skills? Don’t miss the May 20 abiLIVE webinar hosted by ABI’s Legislation Committee. Featured speakers include Bankruptcy Judge Robert L. Jones (N.D. Tex.; Lubbock), Joseph A. Peiffer of AG & Business Legal Strategies (Cedar Rapids, Iowa) and Ronda J. Winnecour, Office of the Chapter 13 Trustee (Pittsburgh). Click here to register for FREE.
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New on ABI’s Bankruptcy Blog Exchange: Agencies Urged to Pause CRA Reform as Banks Manage Pandemic Response
The OCC is plowing ahead on plans to modernize the Community Reinvestment Act, but a growing consensus of industry and community voices says now is not the time for a major overhaul, according to a recent blog post.
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