Unemployment Claims at Nearly 1.5 Million in Latest Week

Unemployment Claims at Nearly 1.5 Million in Latest Week

ABI Bankruptcy Brief

June 25, 2020

ABI Bankruptcy Brief

Unemployment Claims at Nearly 1.5 Million in Latest Week

The Labor Department reported that nearly 1.5 million workers filed new claims for state unemployment insurance last week, the 14th week in a row that the figure has topped 1 million, the New York Times reported. An additional 728,000 filed for benefits from Pandemic Unemployment Assistance, a federally funded emergency program aimed at covering the self-employed, independent contractors and other workers who don’t qualify for traditional unemployment insurance. To be sure, the weekly pace of new state filings is a fraction of the more than 6.5 million recorded in early April. As businesses have reopened, some employees have been called back. The total number of people collecting state unemployment insurance for the week ending June 13 was 19.5 million, seasonally adjusted, a decrease of 767,000 from the previous week and down from nearly 25 million in early May.

Analysis: How Coronavirus Upended a Trillion-Dollar Corporate Borrowing Binge and Kicked Off a Wave of Bankruptcies

After years of loading up on debt due to low interest rates, buyouts and increasingly lax lending standards, the coronavirus pandemic hit U.S. businesses at a bad time, according to a Wall Street Journal analysis. Much of that borrowing was bankrolled by an elaborate ecosystem of debt funds called collateralized loan obligations (CLOs). CLOs buy up risky corporate loans and turn them into supposedly safe bonds that are bought by banks, insurance firms and other global investors. Those securities are now struggling because of the economic slowdown. Debt-laden companies like Neiman Marcus, Hertz and J.Crew have already gone bust. That has ricocheted back to the CLOs that own their loans. Prices have been volatile, and investors are reassessing the risks of CLOs, crimping the supply of credit when it is needed most. The government stimulus, the Federal Reserve’s rescue of the markets and a modest economic rebound appear to have saved CLOs from big losses. The risk now is that investors that have been big buyers of CLOs will stay away after the roller-coaster ride they have experienced. A Japanese bank that owned about 10 percent of all CLO debt has already done that. The slowdown in lending could make it hard for companies that need cash and could limit deal-making. If companies can’t borrow, they can’t spend or even reopen. That could become a drag on the economic recovery and prolong the slowdown caused by the pandemic. (Subscription required.)

New Statistics on ABI's SBRA Website Show that Nearly 500 Small Businesses Have Elected to File Bankruptcy Under New Subchapter V Provision Since It Became Effective in February

A new statistical table and analysis available on ABI’s SBRA Resources website show that 471 small businesses have elected to file for bankruptcy relief under new subchapter V to chapter 11 of the Code since it was enacted. The Small Business Reorganization Act of 2019 (SBRA) took effect on February 19, 2020, to provide a better path for small businesses to successfully restructure, reduce liquidations, save jobs and increase recoveries to creditors, and it also recognizes the value provided by entrepreneurs. In response to the economic distress caused by the COVID-19 coronavirus pandemic, the CARES Act on March 27 increased the eligibility limit for small businesses looking to file under subchapter V from $2,725,625 of debt to $7,500,000. The threshold will return to $2,725,625 after 1 year. While no official (e.g., government) figures on subchapter V cases have been released to date, ABI’s Ed Flynn compiled the figures after a case-by-case review of records from the PACER system. In addition to providing the monthly totals of subchapter V elections, he included an analysis of the filings on the SBRA Resources website that also breaks down the subchapter V elections by circuit. “The data on subchapter V elections and additional analysis from Ed Flynn will help provide a better picture to practitioners, researchers and the public about how struggling small businesses are utilizing the new law,” said ABI Executive Director Amy Quackenboss. “These statistics, and the wealth of information contained within ABI’s SBRA Resources site, make the site an invaluable reference.” Click here to view and bookmark the SBRA Resources website.

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FDIC to Lift Post-Crisis Curb on Banks

Federal regulators are set to roll back a post-crisis rule that could free up tens of billions of dollars for major banks, delivering Wall Street one of its biggest wins of the Trump administration, the Wall Street Journal reported. The Federal Deposit Insurance Corp. plans to complete a final rule reducing the amount of cash that banks must set aside as collateral to cover potential losses on swap trades. The Federal Reserve and Office of the Comptroller of the Currency also plan to sign off on the changes. Last year, the largest 20 participants in the swaps market had to set aside $44 billion to comply with a 2015 requirement that they collect a set amount of collateral, known as initial margin, in swaps transactions between affiliates of the same firm. Swaps are a form of derivatives in which two parties agree to exchange payments based on fluctuations in interest rates, currencies or other financial instruments. A lack of transparency in the market for swaps, and exposure to huge losses, was a contributor to the 2008 financial crisis. Regulators in the years since the crisis have required standardized swaps to trade on exchanges known as clearing facilities, to increase transparency and centralize risk. Thursday’s rule applies to swap contracts that are tailor-made and exchanged privately between two parts within the same banking organization. (Subscription required.)

Fitness Industry Works to Rebound from COVID-19

The U.S. fitness industry has been upended by COVID-19-related closures, pushing some large gym chains to rapidly shrink their footprints and refocus on apps for at-home workouts, while many smaller studios have gone out of business, the Wall Street Journal reported. Gym chains 24 Hour Fitness Worldwide Inc. and Gold’s Gym International Inc. filed for chapter 11 after missing out on membership dues. The parent company of New York Sports Clubs and Lucille Roberts gyms, as well as the Boston-focused Best Fitness chain, have both warned of potential bankruptcies. The warnings show how suddenly the industry has been turned upside down, due to gyms’ potential for spreading the virus. People working out for 15 minutes or longer in confined spaces are at higher risk for contracting COVID-19, said Armand Dorian, chief medical officer at USC Verdugo Hills Hospital. The risk of transmission is higher in gyms because people are using shared equipment and breathing heavily, Dr. Dorian said. Of the more than 1,400 fitness clubs run by Equinox Holdings Inc. and Life Time Inc., as well as the operators of LA Fitness, New York Sports Clubs and the largest owners of Planet Fitness franchises, about 37 percent had reopened by early June, according to credit-rating firm Moody’s Investors Service Inc. Gym employees felt the pain as chains furloughed thousands of them. The financial reckoning sweeping much of the industry is being felt by small-business owners offering yoga, cycling and fitness classes. They face racking up losses while running at reduced capacity to maintain social distancing while balancing rent payments and other operating expenses. (Subscription required.)

Congressional Watchdog: Treasury Sent More than 1 Million Coronavirus Stimulus Payments to Dead People

The federal government sent coronavirus stimulus payments to almost 1.1 million dead people totaling nearly $1.4 billion, Congress’s independent watchdog reported yesterday, the Washington Post reported. The U.S. Government Accountability Office, an independent investigative agency that reports to Congress, issued the finding as part of a comprehensive report on the nearly $3 trillion in coronavirus relief spending approved by Congress in March and April. It said that it had received the information from the Treasury Inspector General for Tax Administration in an accounting as of April 30. The GAO said that the payments to dead people came as Treasury and the IRS rushed to disburse some 160.4 million of these payments totaling $269 billion after the CARES Act was passed in March. The problem relates partly to the fact that, while the IRS has access to the Social Security Administration’s full set of death records, the Treasury Department and its Bureau of the Fiscal Service — which actually issue the payments — do not, GAO said.

The Tiny Bank that Got Pandemic Aid to 100,000 Small Businesses

From its address on the west side of the Hudson River to its tiny balance sheet, Cross River Bank is nothing like Manhattan’s Wall Street behemoths. But as part of the government’s efforts to stave off an economic catastrophe, it stands among giants, the New York Times reported. Cross River has churned out loans to more than 106,000 businesses through the Paycheck Protection Program, a centerpiece of the government’s $2 trillion CARES Act. That puts it just behind three of the country’s most prolific lenders: Bank of America, JPMorgan Chase and Wells Fargo. Cross River’s size — it has a single branch, in Teaneck, N.J., and just a few billion dollars in assets — means it’s generally described as a community bank. But it’s anything but a small-town lender: Cross River has spent the past decade carving out a lucrative business as a bank for financial technology start-ups trying to compete with traditional banks. When the coronavirus pandemic ground businesses to a halt, the government wanted to use banks to distribute $660 billion in forgivable loans — fast — to small-business owners trying to pay workers who might otherwise become jobless. Cross River was one of the quickest and most aggressive, working with dozens of so-called fintechs to scoop up borrowers who couldn’t get the attention of the big banks.

White House Directs Agriculture Department to Extend Farmer Bailout Money to Lobster Industry

The White House ordered the Department of Agriculture on Wednesday to extend farm bailout aid to the U.S. lobster industry, which has suffered under strained trade relations with China and tit-for-tat tariffs that significantly reduced exports to one of its biggest foreign markets, the Washington Post reported. The order, signed by President Trump on Wednesday, comes weeks after a group of lobster fishermen in Maine asked the president for help and as the administration’s trade agenda is increasingly under strain amid heightened tensions with China. The Trump administration created a $30 billion bailout program to compensate farmers hurt by its trade war with China. The program has proved popular with some farmers, but the extended bailouts have faced criticism for disproportionately helping states in the Midwest that the president depends on politically. Maine could be a swing state in the November election, and Republican politicians in the state have urged the president to provide financial relief to the lobster industry. White House officials defended the action as offering critical relief to lobster fishermen in need of help, while critics said the move underscores the arbitrary nature of the administration’s attempts to ease the pain caused by their trade war.

Central States Virtual Bankruptcy Workshop Starts Today!

The Central States Virtual Bankruptcy Workshop, which kicked off today with sessions on the SBRA and ABI’s Great Debates, continues tomorrow with two concurrent sessions on consumer hot topics and experts discussing liquidating assets, and concludes with a Judicial Round-and-Round session featuring 10 judges from the Sixth, Seventh and Eighth Circuits. Don’t miss the engaging programming, CLE and ethics credit, and excellent networking — all for only $100! Click here to register.

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New on ABI’s Bankruptcy Blog Exchange: Election, Supreme Court Case May Dictate Fate of CFPB's QM Proposal

An imminent high court ruling about the independence of the bureau's director, coupled with the outcome of the Presidential election, could doom a plan to extend GSEs' exemption from tough debt-to-income requirements on mortgages, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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