September 14 – New commercial bankruptcy filings continued to decline throughout 2021, but experts say the favorable conditions that have allowed companies to avoid Chapter 11 for now will not last forever, as the consequences of questionable agreements and underlying operational problems will arise. the front.
Commercial bankruptcy filings exploded in 2020 but flowed out in early 2021. Despite some predictions that new cases would rise in the second half of the year due to the COVID-19 pandemic, filings fell to record levels as Relief efforts have helped fend off, at least temporarily, serious financial problems.
The total number of new Chapter 7 and 11 bankruptcy cases filed for the 12 months ending June 30, 2021 was the lowest since 1985, according to the U.S. Courts Administrative Office. Commercial deposits fell 17.7% to 18,511 from the previous year.
Even the dollar amount of this year’s bankruptcy filings has plummeted. The largest corporate bankruptcy in 2020 was Hertz Global Holdings Inc with $ 25.43 billion in assets at the time of filing, while that of 2021 was offshore driller Seadrill Ltd, with $ 7.29 billion. of assets, according to a report compiled by Cornerstone Research.
The obvious explanation for the lower number of business deposits is the continued strength of the capital markets which has facilitated access to finance. But some companies have also been given greater flexibility to make internal structural changes during the pandemic, said Lucy Kweskin, Mayer Brown’s restructuring partner.
“Companies have been able to implement clandestine layoffs and other cost-cutting measures that in other environments would have generated bad publicity and fostered strained relations with employees,” Kweskin said.
Meanwhile, the lenders have maintained a flexible approach to the debts owed to them. In some cases – especially those involving movie theaters, theme parks, and cruise ships, or any business that depends on a large number of people to assemble – lenders try to avoid a situation where they become owners of the businesses. who owe them money, James Bromley, co-director of global restructuring at Sullivan & Cromwell, said.
“Are creditors really interested in owning a chain of theaters right now? The answer is no, ”he said.
Instead of foreclosure, Bromley said, lenders are more likely to extend debt or seek increased collateral. But these are not long-term solutions to a company’s underlying financial problems, especially in areas like the airline and automotive industries, he said.
In addition, a model of low returns on credit opportunities led some investors to seek riskier investments because they were the only ones offering decent returns, Bromley said. Those questionable investments will likely turn south, Bromley added, which could lead to an increase in corporate bankruptcy filings in 2022 or 2023 as borrowers are unable to meet the terms of their agreements.
“There are bad deals that attract a lot of money and those bad deals are going to go wrong,” Bromley said.
Retailing had a particularly quiet year compared to 2020, when giants like JC Penney and Neiman Marcus filed for bankruptcy protection. As of August, there had only been nine notable retail bankruptcies filed in 2021, according to the data collected by the financial consulting firm BDO. None had the same level of name recognition as the 2020 cases.
BDO partner David Berliner says the slowdown in retail bankruptcies is due in part to the fact that they still have the upper hand over landlords, who will often accept reduced rent if it prevents total cancellation of leases.
“Right now, the pendulum has swung in favor of retailers in their battle with landlords,” as landlords try to stop tenants from fleeing, he said.
The back-to-school and holiday shopping seasons are likely to bode well for retailers this year, especially given low consumer spending in 2020, Berliner said.
However, a rebound in retail could be compromised by the higher wages needed to bring workers back to stores and tight inventory caused by shipping delays, he added.
Plus, he said, consumers may soon be cutting back on discretionary spending because of the extra debt they’ve taken on to stay afloat over the past year.
Ultimately, however, companies will almost always try to resolve their financial issues outside of a bankruptcy courtroom, if only to avoid the press and public scrutiny that accompanies an official filing. of Chapter 11. This will always be the case, even in the event of a pandemic.
“Some people may say, ‘I can’t resist this business and this climate anymore,’ and the Delta variant pushes them to the brink and ends up selling assets,” Kweskin said. “But some of that doesn’t necessarily have to be in court.”