Bankruptcy filings are down, but lousy deals and operational woes will change that – Reuters

(Reuters) - New commercial bankruptcy filings have continued to fall throughout 2021, but experts say the favorable conditions that have allowed businesses to stave off Chapter 11 for the time being wont last forever as the consequences of questionable deals and underlying operational problems come to the fore.

Commercial bankruptcy filings exploded in 2020 but trickled off as 2021 began. Despite some predictions that new cases would pick up in the latter half of the year as a result of the COVID-19 pandemic, filings have fallen to record lows as relief efforts helped fend off, at least temporarily, severe financial woes.

The total number of new Chapter 7 and Chapter 11 bankruptcy cases filed for the 12 months ending June 30, 2021 were the lowest since 1985, according to the Administrative Office of the U.S. Courts. Commercial filings fell 17.7% to 18,511 compared with the previous year.

Even the dollar amount of this years bankruptcy filings dropped. The largest corporate bankruptcy in 2020 was Hertz Global Holdings Inc with $25.43 billion in assets when it filed, while 2021s has been offshore driller Seadrill Ltd, with $7.29 billion in assets, according to a report compiled by Cornerstone Research.

The obvious explanation for the lower number of business filings is the sustained strength of the capital markets that has made it easy to access financing. But some businesses have also enjoyed greater flexibility to make internal structural changes during the pandemic, Mayer Brown restructuring partner Lucy Kweskin said.

Companies have been able to implement under-the-radar layoffs and other cost-cutting measures that, in other environments, would have garnered bad publicity and fostered tense employee relations, Kweskin said.

Meanwhile, lenders have maintained a flexible approach to the debts theyre owed. In some cases notably those involving movie theaters, theme parks, and cruise ships, or any business that depends on large amounts of people to gather lenders are trying to avoid a situation in which they become owners of the companies that owe them money, Sullivan & Cromwell's global restructuring co-head James Bromley said.

Are creditors really interested in owning a movie theater chain at this moment? The answer is no, he said.

Instead of foreclosing, Bromley said, lenders are more likely to extend debt or seek increased collateral. But those arent long-term solutions to a companys underlying financial problems, especially in areas like the airline and auto industries, he said.

Additionally, a pattern of low yields on credit opportunities led some investors to go after riskier investments because they were the only ones that offered decent returns, Bromley said. Those questionable investments will likely turn south, Bromley added, which could lead an uptick in corporate bankruptcy filings in 2022 or 2023 as borrowers are unable to live up to the terms of their deals.

There are bad deals that are attracting a lot of money and those bad deals will go bad, Bromley said.

Retail has had an especially quiet year compared with 2020, when giants like JC Penney and Neiman Marcus sought bankruptcy protection. As of August, there were only nine notable retail bankruptcies filed during 2021, according to data collected by financial advisory firm BDO. None have 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 they still have the upper hand over landlords, who will often agree to discounted rent if it prevents leases from getting canceled altogether.

Right now the pendulum has swung in favor of retailers in their battle with landlords, as landlords try to keep tenants from fleeing, he said.

Back-to-school and holiday shopping seasons are likely to bode well for retailers this year, especially compared with the low spending by consumers during 2020, Berliner said.

However, a retail rebound could be undermined by the higher wages necessary to bring employees back into stores and tight inventories caused by shipping delays, he added.

Additionally, he said, consumers could scale back their discretionary spending soon as a result of extra debt they took on to stay afloat over the past year.

In the end, however, companies will almost always try to solve their financial troubles outside of a bankruptcy courtroom, if only to avoid the press and public scrutiny that comes with a formal Chapter 11 filing. That will still be the case, even in a pandemic.

You may have some people say, I just cant weather this business and climate anymore, and the Delta variant pushes them to the brink and they end up selling assets, Kwestin said. But some of that may not necessarily need to be in court.

Maria Chutchian reports on corporate bankruptcies and restructurings. She can be reached at maria.chutchian@thomsonreuters.com.

More:

Bankruptcy filings are down, but lousy deals and operational woes will change that - Reuters