Analysis: Bankruptcy Filings Are Down, but Bad Deals and Operational Woes Will Change That​​​​​​

New commercial bankruptcy filings have continued to fall throughout 2021, but experts say that the favorable conditions that have allowed businesses to stave off chapter 11 for the time being won’t last forever as the consequences of questionable deals and underlying operational problems come to the fore, according to a Reuters analysis. 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 year’s bankruptcy filings dropped. The largest corporate bankruptcy in 2020 was Hertz Global Holdings Inc. with $25.43 billion in assets when it filed, while 2021’s largest so far 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, which 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. Meanwhile, lenders have maintained a flexible approach to the debts they’re 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, said Sullivan & Cromwell's global restructuring co-head, James Bromley. Instead of foreclosing, Bromley said, lenders are more likely to extend debt or seek increased collateral. But those aren’t long-term solutions to a company’s 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 to an uptick in corporate bankruptcy filings in 2022 or 2023 as borrowers are unable to live up to the terms of their deals.​​

Retail Sales Increase Slightly in August Despite Delta Variant, Supply Snags​​​​​​

Retail sales rose slightly in August despite soaring cases of COVID-19 and supply chain snags, reversing from a decline in July and beating expectations of another decrease, The Hill reported. Sales for retail and food services totaled $618.7 billion last month, according to data released Thursday by the Commerce Department, rising 0.7 percent after falling 1.8 percent in July. Analysts expected retail sales to decline another 0.8 percent in August, according to consensus estimates, as the Delta variant dramatically slowed job growth, walloped consumer confidence surveys and created more disruption in supply lines. But a surge of online shopping and sharp increases in sales at large retailers and furniture stores helped offset pullbacks driven largely by pandemic forces. Sales by nonstore retailers rose 5.3 percent in August after falling 4.6 percent in July, and sales at general merchandise stores rose 3.5 percent. Furniture sales also rose 3.4 percent after falling 0.1 percent in July, and food and beverage stores posted a 1.8 percent gain. Even so, activity fell off in several sectors highly vulnerable to rising COVID-19 cases, recent shortages of computer chips and backlogs exacerbated by shipping delays. Restaurants and bars saw sales flatline in August as the sector lost 42,000 jobs. Economists have attributed both setbacks to the delta surge fueling health concerns and pushing people away from in-person dining and drinking.​​

Malls Bounce Back, but Brace for Tough Fall Season​​​​​​

U.S. shopping malls have enjoyed a busy summer despite the spread of the COVID-19 Delta variant, providing a much-needed boost to retailers and property owners, the Wall Street Journal reported. In July, mall foot traffic surpassed 2019 levels for the first time since the pandemic started, according to data analytics firm Placer.ai. Mall visits overall were up 0.7% from July 2019, led by trips to outdoor malls, which were up 2.1%. Warm weather drew people out of their homes, while newly vaccinated Americans felt more comfortable being around strangers in enclosed spaces, analysts said. “After a year and a half of staying inside there was a pent-up demand for doing something, and that something could have been just going to a mall,” said Sarah Helwig, an assistant vice president at Morningstar Credit Information and Analytics. The increase in visits lifted retail sales, helping drive up the share prices of the country’s biggest publicly traded mall owners. Some, such as Macerich Co. and Simon Property Group Inc., are up more than 50% year-to-date, easily surpassing the S&P 500 index’s roughly 19% return for the year. Still, the sector faces fresh challenges in the months ahead. Colder weather often weighs on outdoor shopping centers, while the rise in COVID-19 infections could make more shoppers hesitant to visit indoor malls, analysts said. (Subscription required.)​​

U.S. Unemployment Claims Rise After Hitting Pandemic Low​​​​​​

The number of Americans seeking unemployment benefits moved up last week to 332,000 from a pandemic low, a sign that worsening COVID infections may have slightly increased layoffs, the Associated Press reported. Applications for jobless aid rose from 312,000 the week before, the Labor Department said Thursday. Jobless claims, which generally track the pace of layoffs, have fallen steadily for two months as many employers, struggling to fill jobs, have held on to their workers. Two weeks ago, jobless claims reached their lowest level since March 2020. The increase since then has been small and may be temporary. The four-week average of jobless claims, which smooths out fluctuations in the weekly data, dropped for the fifth straight week to just below 336,000, the lowest since the pandemic began. Unemployment aid applications jumped 4,000 in Louisiana, evidence that Hurricane Ida led to widespread job losses in that state. Ida will likely nick the economy's growth in the current July-September quarter, though repairs and rebuilding efforts are expected to make up for some of that in the coming months. The job market and the broader economy have been slowed in recent weeks by the Delta variant, which has discouraged many Americans from traveling, staying in hotels and eating out. Earlier this month, the government reported that employers added just 235,000 jobs in August after having added roughly a million people in both June and July. Hiring in August plummeted in industries that require face-to-face contact with the public, notably restaurants, hotels and retailers. Still, some jobs were added in other areas, and the unemployment rate actually dropped to 5.2% from 5.4%.​​

Analysis: COVID Mortgage Bailouts Are Expiring Fast, but Here’s Why a Foreclosure Crisis Is Unlikely​​​​​​

The number of borrowers in both government and private sector COVID mortgage bailout programs is falling fast, but for those still in trouble, the future is not as bleak as originally thought, according to a CNBC.com commentary. Extraordinarily high levels of home equity, thanks to the recent runup in home prices, has struggling borrowers in a far better position now than they were at the start of the pandemic. The number of active mortgage forbearance plans, in which borrowers were allowed to delay their monthly payments, fell by more than 5% from the previous week, according to a new report from Black Knight, a mortgage data and analytics firm. The drop was driven by August expirations. Borrowers were allowed up to 18 months of forbearance from entry into the programs, so expirations are now rolling. September is expected to see an outsized group of 400,000 expirations because the wave of borrowers enrolling was highest in March and April 2020. There are still 1.618 million borrowers in forbearance programs (down from roughly 5 million at the peak in May 2020), or 3.1% of all outstanding mortgages, representing an unpaid balance of $313 billion. But 98% of those troubled borrowers now have at least 10% equity in their homes, not counting their missed payments. Including those payments, 93% still have more than 10% equity. Given today’s tight housing market, the majority could easily sell and still pocket some profit.​​

ABI's Views from the Bench Program Returns Next Friday with In-Person and Virtual Attendance Options!​​​​​​

ABI’s popular Bankruptcy 2021: Views from the Bench program will take place on Sept. 24 and will feature the views of more than 20 sitting and retired bankruptcy judges during a full day of high-quality CLE and networking opportunities. Attendees will have the option of attending the program either in person at the JW Marriott in Washington, D.C., or virtually via an innovative online platform. This year’s program will examine a number of current issues related to bankruptcy case confirmation, the changing real estate landscape, small business reorganization and much more. Attendees have the chance to earn up to 6/7.2 hours of CLE/CPE credit and up to 1.2 hours of ethics.

Click here to register!

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