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Potential Wave of U.S. Bankruptcies Draws Nearer as Corporate Distress Spreads

ABI Bankruptcy Brief

May 7, 2020

ABI Bankruptcy Brief
 
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.

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

 
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Congress May Be Forced to Deal with Coming Wave of Bankruptcies

ABI Bankruptcy Brief

May 14, 2020

 
ABI Bankruptcy Brief
 
 
NEWS AND ANALYSIS

Congress May Be Forced to Deal with Coming Wave of Bankruptcies

Despite record unemployment numbers, consumer bankruptcies declined last month by more than 30 percent compared with last year, according to ABI data, CQ Roll Call reported. Prof. Bob Lawless of the University of Illinois College of Law and reporter for ABI’s Commission on Consumer Bankruptcy said that consumers usually file for bankruptcy after they’ve hit rock bottom, rather than in the middle of a crisis. “People are probably going to use consumer credit to smooth over the problems they have right now,” he said. “It doesn’t make sense to file bankruptcy if you are just going to continue to pile up debts.” If Congress fails to act soon, bankruptcy courts could be overwhelmed by a record number of newly jobless consumers looking to shed crushing debts, said Raymond Kluender, an economist at the Harvard Business School. More than 20 million people filed for unemployment in April. Some research indicates there could be 10 or more bankruptcy cases for each additional 1,000 job losses — meaning that 200,000 people could eventually end up filing for bankruptcy based on April’s numbers alone, Kluender said. If the economic crisis continues, bankruptcy filings could eclipse those sparked by the Great Recession, which peaked at more than 1.5 million filings in 2010. “The actual capacity of the court system to process and adjudicate bankruptcy filings is quite fixed, and we have to start to think about what 20 or 30 million unemployed is going to mean,” Kluender said. Late last month, the Judicial Conference requested more than $36 million in additional appropriations. That would include funds to turn 14 temporary bankruptcy judgeships into permanent spots and to extend deadlines so that courts can handle an expected increased caseload.



The Judicial Conference of the U.S. sent a letter on April 28 to leaders on the House and Senate Appropriations Committees with a $36.6 million request for COVID-19 prevention, preparedness and response in the court system. The Judicial Conference also requested that temporary judges be converted to permanent, new judgeships to meet anticipated caseload increases and that temporary authority be granted to bankruptcy courts to extend or “toll” certain statutory deadlines under the Code. Click here to read the full letter.

Weekly Jobless Claims Total 2.981 Million in Latest Dept. of Labor Report

New filings for unemployment claims totaled just shy of 3 million for the most recent reporting period, a number that while still high declined for the sixth straight week, according to Labor Department figures, CNBC.com reported. The total 2.981 million new claims for unemployment insurance filed last week brought the coronavirus crisis total to nearly 36.5 million, by far the biggest loss in U.S. history. The count announced last week was revised upward by 7,000 to 3.176 million, putting the weekly decline at 195,000 between the two most recent reports. While the numbers have been declining since the March 28 peak, joblessness remains pervasive through the U.S., even as states continue to come back online slowly following the economic shutdown. The Labor Department reported a loss of 20.5 million jobs in April that brought the unemployment rate to 14.7 percent, both post-World War II highs.


In related news, a report released by the Federal Reserve showed that the coronavirus crisis led to dramatic changes in Americans’ finances as millions of workers faced layoffs or other cutbacks in their jobs, with low-wage workers taking the biggest hit, Reuters reported. Nearly one in five of all adults either lost their jobs or had their hours reduced at work in March, the survey found. The job cuts were most severe for lower-income workers, with 39 percent of people with a household income of less than $40,000 reporting a job loss in March. That compares to 19 percent of workers with household incomes between $40,000 and $100,000 and only 13 percent of workers with household incomes above $100,000, the Fed said.

Congress, States and Cities Aim to Assist Struggling Renters

Across the country, dozens of state and local programs have emerged to prevent a potential wave of evictions as the country’s unemployment rate reaches historic highs and as moratoriums that prevent landlords from removing tenants from their homes begin to expire. But these patchwork measures are not likely to be enough to prevent millions of people from losing their homes in the coming months, housing industry officials and economists say, the Washington Post reported. Amherst, a data and analytics real estate firm, estimates that up to 28 million renters, or 22.5 percent of all U.S. households, are at risk of eviction or foreclosure because of the coronavirus. House Democrats included $100 billion for a national rental assistance program in their $3 trillion coronavirus relief bill (HEROES Act) this week. Republicans quickly rejected the proposed legislation, and some tenant advocacy groups say $100 billion will not be enough. Many communities were already suffering a housing affordability crisis that made renters more vulnerable to financial shocks from the coronavirus pandemic, they say. The number of Americans struggling to pay their rent or mortgage has exploded since March, as unemployment rates have reached heights unseen since the Great Depression. As of May 7, nearly 4.1 million homeowners were receiving mortgage relief, up 7 percent from the end of April and 2,600 percent from the beginning of March, according to Black Knight, a mortgage technology and data provider.


 

Dept. of Education Discloses It Is Illegally Seizing Wages of 54,000 Borrowers

The CARES Act was supposed to suspend all wage garnishments for borrowers in default on their government-held federal student loans. But for many student loan borrowers, that suspension has not happened — and it was supposed to be effective as of March 13, 2020, nearly eight weeks ago, Forbes reported. Student loan borrowers filed a lawsuit against Education Secretary Betsy DeVos earlier in May to force the Department of Education to comply with the CARES Act and stop the ongoing wage garnishments. In a court filing on Monday, the Department of Education disclosed that a staggering 54,000 borrowers continue to have their wages garnished despite the mandate of the CARES Act. One out of every eight student loan borrowers whose wages were being garnished prior to the effective date of the CARES Act continues to have their wages garnished today. In the lawsuit — Elizabeth Barber v. DeVos, filed in the U.S. District Court for the District of Columbia — student loan borrowers are seeking class action status to stop the Department of Education from continuing to garnish their wages in violation of the CARES Act. The student loan borrowers are being represented by the National Student Loan Legal Defense Network and the National Consumer Law Center, with support from the Student Borrower Protection Center.


 

SBA Backs Off Threat Against Firms that Didn’t Need Loans

The Trump administration said firms that took loans of more than $2 million that they didn’t need from a small business aid program would be allowed to repay the money without legal consequences, reversing an earlier threat that the government could pursue them criminally, Bloomberg News reported. New guidance issued yesterday for the Paycheck Protection Program by the Small Business Administration and the Treasury Department also said that companies that accepted loans of less than $2 million will automatically be determined to have done so in good faith because they’re less likely to have access to other resources. The guidance came before the deadline today that the SBA and Treasury had set for firms that weren’t eligible for a PPP loan to return them without penalty, and it provides more assurance for firms with smaller loans who were uncertain about whether they should keep the money. Some companies have reported returning loans even though they think they’re eligible amid changing rules and guidance.


 

White House Opens Door to State Aid

White House officials have privately signaled that they are willing to provide tens of billions of dollars in relief to states as part of a bipartisan deal with Democrats in the coming weeks, despite President Trump’s reluctance and strong opposition from conservative groups, the Washington Post reported. Although that position is likely to anger some Republicans who have warned that Democrats want “blue state bailouts,” many White House officials now believe that providing new funding to states to deal with challenges related to the novel coronavirus will be necessary if they want to secure their own priorities, such as tax breaks and liability protections for businesses. Two White House officials said they have made it clear to business leaders and conservative allies in recent days that Trump is “not willing to provide a blank check” to states, but is “open” to negotiating depending on whether he can win concessions from Democrats on taxes in exchange for an influx of cash — and they have told conservative leaders that they will make sure any new cash is directed only toward problems sparked by the pandemic. An unveiling of the White House’s tax proposals is expected in the coming days.


 

Jefferson County Bankruptcy May Foreshadow Fate of Cities in Crisis

A massive share of the local government’s tax revenue disappears. Elected officials lay off employees and shutter a health care facility used by the poorest residents. Road work grinds to a halt. Residents wait in hours-long lines to renew their licenses. That was 2011 for Jefferson County, Ala., whose financial crisis may preview what’s ahead for local governments hammered by the worst economic collapse in decades, according to a Bloomberg News analysis. Jefferson County filed what was then the biggest local government bankruptcy in November 2011 to get out from under the weight of $3 billion of debt issued for its sewer system. What pushed it over the edge was the decision by Alabama’s highest court to strike down a wage tax that generated $75 million annually. The county didn’t have the power to raise other taxes to make up for the gap. Jefferson County’s painful past may be the future for some local governments facing what could become the biggest fiscal crisis in decades. With an aid package still pending in Congress, local governments are preparing to cut services, idle employees, raise taxes and sell assets. As a last resort, those burdened by excessive long-term debt and pension obligations could file for bankruptcy, although so far investors and analysts haven’t predicted a wave of insolvencies, and not every state even allows it.


 

OECD Chief Warns that Coronavirus Debt Will “Come Back to Haunt Us”

Organization for Economic Cooperation and Development Secretary-General Angel Gurría yesterday warned that the debt countries and companies take on to weather the coronavirus pandemic would be a drag on economies in the future, The Hill reported. The debt, he said, would “come back to haunt us.” “We are going to be heavy on the wing because we are trying to fly and we were already carrying a lot of debt and now we are adding more,” Gurría said. Governments are struggling with how much debt they can take on to keep their economies afloat during lockdowns. Some economists have argued that the move toward austerity in the aftermath of the 2009 financial crisis was too swift and led to a slow, anemic recovery. But debt-saddled governments may worry about the prospect of a painful default down the road if their debt becomes unsustainable and their economies falter. A default, or even the prospect of one, can cause its own set of financial concerns and economic pain. The comments came just hours after Federal Reserve Chairman Jerome Powell came out in favor of deficit spending that could support the economy.


 

Upcoming abiLIVE Webinars Look to Update Chapter 12 Skills, Provide a Look at COVID-19 Relief Funding and Reopening America, and Examine the Health Care Industry in the Shadow of COVID-19

Upcoming abiLIVE webinars will provide a look at key issues for practitioners amid the economic downturn due to the COVID-19 pandemic. Registration is FREE for these upcoming programs; CLE is available for an administrative fee.

• Hosted by ABI’s Legislation Committee, the “Update Your Chapter 12 Skills” webinar on May 20 features Bankruptcy Judge Robert L. Jones (N.D. Tex.), Joseph A. Peiffer of AG & Business Legal Strategies (Cedar Rapids, Iowa) and Chapter 13 Trustee Ronda J. Winnecour (Pittsburgh). Register here.

• The “COVID-19 Relief Funding & Reopening America: What’s Really Happening in Congress” webinar on May 21 features former House Speaker John Boehner and current senior U.S. Senator Joe Manchin (D-W. Va.), who will share their thoughts on how best to safely and gradually re-open business across America. Panelists also include Stephen D. Lerner (Cincinnati), James Barresi (Washington, D.C.), Karol K. Denniston (San Francisco) and Edward J. Newberry (Washington, D.C.), all from Squire Patton Boggs. Register here.

• Sponsored by Getzler Henrich Management & Financial Consultants, the “Health Care in the Shadow of COVID-19: What Will the “New Normal” Look Like?” webinar features David Campbell of Getzler Henrich & Associates LLC (Chicago), Brian Fortune of Farragut Square Group (Washington, D.C.), Jeremy Johnson of Polsinelli (New York), Dan Polsky of Getzler Henrich & Associates LLC (New York) and Christopher A. Ward of Polsinelli (Wilmington, Del.). Register here.

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New on ABI’s Bankruptcy Blog Exchange: Post-COVID-19 Appraisals and the Burden of Proof in Bankruptcy Cases

A recent blog post summarizes the challenges faced by bankruptcy judges and practitioners in this post-COVID-19 climate of uncertain real estate values.

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

 
© 2020 American Bankruptcy Institute
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Alexandria, VA 22314
 

U.S. Weekly Jobless Claims Remain High as Backlogs, Layoffs Linger

ABI Bankruptcy Brief

May 21, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

U.S. Weekly Jobless Claims Remain High as Backlogs, Layoffs Linger

Millions more Americans filed for unemployment benefits last week as backlogs continue to be cleared and disruptions from the novel coronavirus unleash a second wave of layoffs, pointing to another month of staggering job losses in May, Reuters reported. Initial claims for state unemployment benefits totaled a seasonally adjusted 2.438 million for the week ended May 16, the Labor Department said yesterday. Data for the prior week was revised down to show 2.687 million claims filed instead of the previously reported 2.981 million. Connecticut said last week it had misreported its numbers. Last week’s claims data covered the week during which the government surveyed establishments for the non-farm payrolls portion of May’s employment report. The economy lost a record 20.5 million jobs in April, on top of the 881,000 shed in March.

Study: Many Jobs May Vanish Forever as Layoffs Mount

While the Labor Department has found that a large majority of laid-off workers expect their joblessness to be temporary, there is growing concern among economists that many of their jobs will never come back, the New York Times reported. “I hate to say it, but this is going to take longer and look grimmer than we thought,” Nicholas Bloom, an economist at Stanford University, said of the path to recovery. Bloom, a co-author of an analysis of the coronavirus epidemic’s effects on the labor market, estimates that 42 percent of recent layoffs will result in permanent job loss. “Firms intend to hire these people back,” Bloom said, referring to a recent survey of businesses done by the Federal Reserve Bank of Atlanta. “But we know from the past that these aspirations often don’t turn out to be true.” In this case, the economy that comes back is likely to look quite different from the one that closed. If social distancing rules become the new normal, causing thinner crowds in restaurants, theaters and stores, at sports arenas, and on airplanes, then fewer workers will be required. A household survey from the Census Bureau released Wednesday suggested that the pain was widespread: 47 percent of adults said they or a member of their household had lost employment income since mid-March. Nearly 40 percent expected the loss to continue over the next four weeks.

Mnuchin Sees 'Strong Likelihood' of Needing Another COVID-19 Relief Bill

Treasury Secretary Steven Mnuchin today said that there is a "strong likelihood" that another coronavirus relief bill will be needed, as more states start to reopen and the economy struggles to stabilize, The Hill reported. "I think there is a strong likelihood we will need another bill, but we just have $3 trillion we're pumping into the economy," Mnuchin said. "We're going to step back for a few weeks and think very clearly how we need to spend more money and if we need to do that," he added. His comments follow those of White House economic adviser Kevin Hassett, who said earlier this week that he thinks another coronavirus bill might not be necessary. On Capitol Hill, Republicans and Democrats are divided over how to tackle additional legislation. House Democrats last week passed a $3 trillion relief package, but Senate Republicans have said that the bill is dead on arrival in their chamber. Some GOP senators have indicated they want to move quickly on another measure, but Senate Majority Leader Mitch McConnell (R-Ky.) has signaled a desire to move more slowly in order to first evaluate what is and isn't working from previous relief bills that were signed into law.



In related news, Mitch McConnell promised House Republicans yesterday that the beefed-up unemployment benefits enacted earlier this spring "will not be in the next bill," Politico reported. The Senate majority leader told the House GOP minority in an afternoon phone call that he is comfortable waiting to see how the nearly $3 trillion in coronavirus spending previously approved plays out before moving forward on the next relief legislation. And he told them the ultimate end-product won't look anything like House Democrats' $3 trillion package passed last week. While McConnell conceded that more aid may be necessary in the coming weeks, he also repeated his insistence that liability reform be included in the next round of legislation to minimize lawsuits. In addition, he said the $600 weekly boost in unemployment benefits won't continue — a vow he hadn't previously made. McConnell warned against trial lawyer "vultures" ready to file lawsuits and said Republicans are "going to have to clean up the Democrats’ crazy policy that is paying people more to remain unemployed than they would earn if they went back to work," McConnell said.



In other related news, with unemployment skyrocketing — and some federal financial aid weeks away from running dry — millions of residents newly find themselves at risk of prolonged financial hardship, perhaps even staring down the prospect of homelessness, the Washington Post reported. Despite the U.S. government’s efforts to halt evictions and extend $3 trillion in aid, many say they fear falling behind on their rent or mortgage and lack the means to put off some of those payments until their bank accounts — and the broader economy — are in better shape. On Tuesday, President Trump told Republican senators he wanted to allow the enhanced unemployment benefits to expire in July. Without such aid, more than 1 million families in the New England region might have found their homes at risk, the Boston Fed previously found. In New England alone, roughly 380,000 area homeowners and renters are at risk of falling behind on about $540 million in payments each month, according to the Federal Reserve Bank of Boston, which found that the region is one of the hardest hit by the coronavirus pandemic.

Commentary: Why a Restructuring Strategy Is Needed to Save Jobs and Growth*

Governments have created massive lending programs to businesses to respond to this extraordinary economic crisis. Unfortunately, many of these businesses were highly indebted even before the virus, according to a commentary in the Financial Times by bankruptcy veterans Jay Alix and Richard Gitlin. Combining highly indebted businesses with a collapse in demand and supply chain disruption is a formula for economic stagnation. A shift in policy by governments is urgently required to invest in companies that can grow once debt is reduced to sensible levels and businesses are restructured to adapt to new market realities, according to Alix and Gitlin. Governments will need to invest growth capital, but only as part of a commercially sensible restructuring of both the balance sheet and the business. The development of an extraordinary government agency will probably be required to oversee the job, staffed primarily with restructuring professionals. It would work in concert with the bankruptcy system, harnessing its power to approve compromises and to eliminate contracts that are an impediment to a successful restructuring. In essence, debt reductions, debt-for-equity swaps and equity for new investments will be required. There would be much shared pain by shareholders and existing lenders, and new capital would have to be properly rewarded. Investors specialising in distressed assets would play a significant role in providing liquidity to lenders and would bring restructuring experience to the process. (Free registration required.)



*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.

More than 240 U.S. Energy Bankruptcies Forecast by 2021

A new report by Rystad Energy found that more than 240 U.S. oil and gas companies may be forced to file for bankruptcy protection over the next two years in response to low oil prices, the Houston Chronicle reported. Some 73 energy companies may have to file for chapter 11 protection this year with crude hovering at around $30 a barrel. If prices remain low, another 170 companies are expected to follow in 2021, according to Rystad Energy, a Norwegian energy research firm. If Rystad’s forecast holds true, the number of energy bankruptcies from the coronavirus-driven oil crash will eclipse the last bust, which claimed some 200 companies. Several energy companies have recently filed for bankruptcy, including Whiting Petroleum, Skylar Exploration, Diamond Offshore, Freedom Oil and Gas and Gavilan Resources. The coronavirus pandemic, which has forced businesses to temporarily close and consumers to stay home, has depressed the demand for oil and gas products, causing prices to plummet.


 

Coronavirus Widens Retail Divide, Leaving Macy’s and Victoria’s Secret Behind

The coronavirus pandemic is widening the divide between retailers that are drawing shoppers and those that are losing business, accelerating a split that had been playing out since before the health crisis forced some chains to temporarily close stores, the Wall Street Journal reported. Department stores and apparel retailers are feeling the most pain. Their stores were closed from mid-March through April, and while some buying shifted online, it wasn’t enough to offset the lost sales in physical locations. Macy’s Inc. today offered a glimpse of the damage wrought by the virus, saying that first-quarter sales fell by as much as 45 percent and that it expects to record a roughly $1 billion operating loss when it reports financial results on July 1. Victoria’s Secret parent L Brands Inc. said that quarterly sales fell 37 percent and that it would close about a quarter of the lingerie brand’s stores in North America. Kohl’s Corp. reported a 41 percent drop in sales for the spring quarter, while nearly $5 billion in sales disappeared at off-price retailer TJX Cos.


 

U.S. Existing Home Sales Post Largest Decline in Nearly 10 Years

U.S. home sales logged their biggest drop in nearly 10 years in April as the novel coronavirus pandemic upended the labor market and broader economy, undercutting demand for housing, Reuters reported. The National Association of Realtors said today that existing home sales plunged 17.8 percent to a seasonally adjusted annual rate of 4.33 million units last month. The percentage of decline was the largest since July 2010. Existing home sales, which make up about 90 percent of U.S. home sales, dropped 17.2 percent on a year-on-year basis in April. The report came on the heels of data on Tuesday showing a record collapse in homebuilding and permits in April.


 

Americans Are Cooking More Seafood, but Fishermen Are Struggling

The coronavirus crisis is hitting seafood businesses even harder than the meat industry, prompting fishermen and processors to overhaul their operations and look for new customers, the Wall Street Journal reported. U.S. supermarket shoppers are buying more fish and shellfish to prepare at home during quarantine, but business owners say the rise isn’t enough to offset the loss of sales to restaurants, where 70 percent of seafood is consumed, according to market-research firm Urner Barry. Captains across the country have docked vessels, and distributors have rerouted what fresh fish they can into freezers, sometimes destroying the rest. While nearly two-thirds of seafood eaten in the U.S. is consumed outside the home, sales of other proteins, including chicken, beef and pork, are more evenly split between grocery stores and restaurants. U.S. seafood sales at grocery stores totaled $1.4 billion for the four weeks ending on May 9, a 40 percent increase from a year earlier, according to Nielsen. The $2 trillion federal stimulus package included $300 million for the seafood industry, though companies and trade groups say the sum isn’t enough. A group of 15 distributors surveyed in April by the National Fisheries Institute said they expect to lose $1.7 billion, about 40 percent of their annual revenue, if current conditions last through year’s end.


 

Upcoming abiLIVE Webinar on May 28 to Examine the Health Care Industry in the Shadow of COVID-19

Sponsored by Getzler Henrich Management & Financial Consultants, the “Health Care in the Shadow of COVID-19: What Will the 'New Normal' Look Like?” webinar on May 28 features David Campbell of Getzler Henrich & Associates LLC (Chicago), Brian Fortune of Farragut Square Group (Washington, D.C.), Jeremy Johnson of Polsinelli (New York), Dan Polsky of Getzler Henrich & Associates LLC (New York) and Christopher A. Ward of Polsinelli (Wilmington, Del.). Register here.

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New on ABI’s Bankruptcy Blog Exchange: Coronavirus Could Force a Full-Blown Crisis in Credit-Scoring

Lawmakers are working to head off a wave of pandemic-related personal credit downgrades, but there are bigger problems with how credit risk is assessed that are harder to solve, 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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Big Bankruptcies Sweep the U.S. in Fastest Pace Since May 2009

ABI Bankruptcy Brief

May 28, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

Big Bankruptcies Sweep the U.S. in Fastest Pace Since May 2009

In the first few weeks of the pandemic, it was just a trickle: Companies like Alaskan airline Ravn Air pushed into bankruptcy as travel came to a halt and markets collapsed. But the financial distress wrought by the shutdowns only deepened, producing what is now a wave of insolvencies washing through America’s corporations. In May alone, some 27 companies reporting at least $50 million in liabilities sought court protection from creditors — the highest number since the Great Recession. They range from well-known U.S. mainstays such as J.C. Penney Co. and J. Crew Group Inc. to air carriers Latam Airlines Group SA and Avianca Holdings, their business decimated as travelers stayed put. In May 2009, 29 major companies filed for bankruptcy, according to data compiled by Bloomberg. And year-to-date, there have been 98 bankruptcies filed by companies with at least $50 million in liabilities — also the highest since 2009, when 142 companies filed in the first four months. Few people believe bankruptcies have by any means hit a peak. “I think we’re going to continue to see filings of at least the level we’re seeing for a while,” said Melanie Cyganowski, a former bankruptcy judge now with the Otterbourg law firm. The wave of insolvencies is seemingly at odds with U.S. credit markets, which are busier than ever: Investment-grade corporations were able to cushion their balance sheets by borrowing nearly $1 trillion in the first five months of the year, the fastest pace on record. No such luck for weaker companies. Their revenues have evaporated, straining their ability to keep up with debt payments and all but forcing them to seek refuge in bankruptcy court.

U.S. House Approves Bill Lengthening Coronavirus Small-Business Loan Terms

The U.S. House of Representatives today approved (417-1) legislation increasing the amount of time, to 24 weeks from the current eight-week deadline, for small businesses to use Paycheck Protection Program loans spurred by the coronavirus outbreak, Reuters reported. The program was created in March to help support small businesses during the pandemic and encourage them to retain their employees. Last week, senators were working on a bipartisan bill extending the time frame to 16 weeks, instead of the eight weeks currently in the law or the 24 weeks embraced by the House. If the Republican-controlled Senate passes a bill that varies in any way from the Democratic-led House’s, the two chambers would have to reconcile their differences before legislation could be sent to Republican President Donald Trump for signing into law.



Click here to view the text of H.R. 7010, the "Paycheck Protection Program Flexibility Act of 2020."

Another 2.1 Million File Jobless Claims, but Total Unemployed Shrinks

First-time claims for unemployment benefits totaled 2.1 million last week, the lowest total since the coronavirus crisis began, though it is indicative that a historically high number of Americans remain separated from their jobs, CNBC.com reported. The total represented a decrease of 323,000 from the previous week’s upwardly revised 2.438 million. Continuing claims, or those who have been collecting for at least two weeks, numbered 21.05 million, a clearer picture of how many workers are still sidelined. That number dropped sharply, falling 3.86 million from the previous week. That decline in continuing claims “suggests that the reopening of states is pushing businesses to rehire some of the people let go when the virus hit,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. However, Shepherdson noted that some of the data, particularly from California, remains noisy and may not be an accurate representation of some states’ situations. The insured unemployment rate, which is a basic calculation of those collecting benefits vs. the total labor force, came down sharply to 14.5 percent from 17.1 percent the previous week. The four-week moving average, which helps smooth out weekly volatility, rose to 22.72 million, an increase of 760,250 from the previous week.

Analysis: Reopening Has Begun, but No One Is Sure What Happens Next

Politicians and public health experts have sparred for weeks over when, and under what circumstances, to allow businesses to reopen and Americans to emerge from their homes. But another question could prove just as thorny: How should this be done? Because the restart will be gradual, with certain places and industries opening earlier than others, it will be complicated. The U.S. economy is a complex web of supply chains whose dynamics don’t necessarily align neatly with epidemiologists’ recommendations. Georgia and other states are beginning the reopening process. But even under the most optimistic estimates, it will be months, and possibly years, before Americans again crowd into bars and squeeze onto subway cars the way they did before the pandemic struck. “It’s going to take much longer to thaw the economy than it took to freeze it,” said Diane Swonk, chief economist for accounting firm Grant Thornton. South Carolina, for example, looks likely to be among the first states to allow widespread reopening of businesses. But if a manufacturer there depends on a part made in Ohio, where the virus is still spreading, it may not be able to resume production, regardless of the rules. The White House released a plan this month for a phased reopening of the economy, with restrictions easing as states meet public health benchmarks. States have begun to develop their own road maps. Gov. Andrew M. Cuomo of New York said Tuesday that parts of the state that had fewer coronavirus cases might be allowed to reopen more quickly than New York City and other hard-hit areas.



Miss last week's "COVID-19 Relief Funding & Reopening America: What's Really Happening in Congress" webinar panel featuring former House Speaker John Boehner and current senior U.S. Senator Joe Manchin (D-W. Va.)? Purchase a replay here.

Analysis: U.S. Corporate Bond Sales Smash Record, Soaring to over $1 Trillion

It began with a rush in mid-March, when a pair of U.S. corporate giants, Exxon Mobil Corp. and Verizon Communications Inc., braved the financial turmoil created by the coronavirus pandemic and sold a combined $12 billion of bonds in a single day. Others quickly followed, emboldened by the unprecedented support provided by the Federal Reserve, and before long, deals were being rushed out at a clip never before seen in the history of U.S. bond markets. On Thursday, that boom reached an astonishing milestone: $1 trillion worth of investment-grade corporate debt sales had been brought to market in the first 149 days of the year, Bloomberg News reported. In 2019, a fairly typical year in the bond market, that figure wasn’t reached until November. For the Fed, the borrowing binge is precisely the reaction it was looking for when it announced two months ago that it would prop up companies ravaged by the pandemic by providing a $750 billion promise to buy corporate debt. The Fed has yet to purchase even one individual bond, having only started buying some corporate debt through exchange-traded funds two weeks ago. But from the moment policymakers signaled their intentions, the floodgates opened, rebooting deal activity that had gone dormant earlier in the month and sparking a massive market rebound across nearly all asset classes. For companies, the cash has been a crucial lifeline that could help many of them make it through the economic collapse that the virus triggered. All of this new debt creates a new set of risks, though. U.S. companies were already highly leveraged coming into the crisis, and by helping them heap more debt onto their balance sheets, the Fed runs the risk of deepening the pain if many of them fail to survive the virus. “Leverage is going higher as cash flows are declining. Depending on how the recovery takes shape, this may weigh on credit quality and ratings,” said Steven Boothe, a high-grade debt portfolio manager at T. Rowe Price. “If it’s steep and long drawn out, that will be something to be mindful of.”



New on ABI's COVID-19 Page: Exclusive Snapshot and Analysis of Weekly Bankruptcy Filings!


Looking to see how bankruptcy filings are trending each week? Need insight into the trends and what the notable filings were for that week? ABI's COVID-19 web page now features an exclusive snapshot of weekly stats, along with special insights into the stats by ABI's Ed Flynn, appearing in the left-hand column under "Bankruptcy Statistics." Be sure to circle back to ABI's COVID-19 page to get the latest on weekly filing trends.

Don’t Miss the “COVID-19 Impact: Survival Considerations for Every Hospital” abiLIVE Webinar on June 4

A panel of experts on this special June 4 abiLIVE webinar will discuss the short- and long-term impacts and implications of COVID-19 on current and future hospital financial stability. ToneyKorf's pandemic impact mitigation strategy tool will be discussed as a way that can provide a more precise, data-driven projection of changes to hospital finances. Panelists will also explore the range of recovery and restructuring strategies to bring stability to the uncertain financial future created by this pandemic. Register for FREE.

Central States Virtual Bankruptcy Workshop to Feature Great Sessions, Networking at an Affordable Price!

While ABI had to cancel its in-person Central States Bankruptcy Workshop for 2020 due to the COVID-19 pandemic, some of the sessions designed for this year's program are being converted into a two-day virtual experience, to be held June 25-26. With two online educational sessions each day of the conference, ample networking opportunities both days and a price that is right ($100 for the entire program), it is easy to include the Central States Virtual Bankruptcy Workshop in your schedule this year! Click here to register. 

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New on ABI’s Bankruptcy Blog Exchange: Fed's Rosengren Sees Main Street Loans Within Next Two Weeks

Federal Reserve Bank of Boston President Eric Rosengren said he expects companies to begin receiving money through the central bank's long-awaited Main Street Lending Program within two weeks, according to a recent blog post.

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

 
© 2020 American Bankruptcy Institute
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Nearly 2 Million People Applied for Unemployment Last Week

ABI Bankruptcy Brief

June 4, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

Nearly 2 Million People Applied for Unemployment Last Week

Unemployment claims for the last week of May totaled 1.9 million, a high number, but the lowest since the novel coronavirus started spreading widely back in March, the Washington Post reported. The Department of Labor, which released the data, also noted gig and self-employed workers filed fewer initial claims last week — 620,000 compared with 1.2 million the previous week — under the expanded federal program that grants them benefits. More than 40 million people have applied for unemployment benefits during the pandemic, and roughly 21.5 million are currently receiving them. Unemployment rates by state are highest in Nevada (25 percent), Maine (23 percent), Michigan (23 percent), Hawaii (20.6 percent) and New York (19 percent). Including the new supplemental funds for gig workers, about 30 million people are receiving unemployment benefits.



Faced with staggering unemployment numbers that are likely to remain elevated through the election, Senate Republicans are reversing their positions on ending a federal increase of state unemployment benefits after July, The Hill reported. Senate Majority Leader Mitch McConnell (R-Ky.) vowed in a conference call with House Republicans last month that Senate Republicans would block the $600 weekly boost to state unemployment benefits from the federal government. Also last month, GOP senators involved in planning for a phase four coronavirus relief bill said there was overwhelming support for entirely ending the federal enhancement of state unemployment benefits. Now with the national unemployment rate projected to hit or exceed 20 percent, the highest number since the Great Depression, a growing number of GOP senators say the federal government should continue to augment weekly unemployment benefits in some form — though most want it lower than the $600 figure. Many Republican senators, including members of the leadership, now say that the federal government should continue to enhance state unemployment benefits or provide a back-to-work bonus of $450 per week for laid-off workers who return to their jobs.

Workers Fearful of the Coronavirus Are Getting Fired and Losing Their Benefits

As people across the U.S. are told to return to work, some employees who balk at returning due to the pandemic’s health risks say that they are experiencing painful reprisals: Some are losing their jobs if they try to stay home, and thousands more are being reported to the state to have their unemployment benefits cut off, the New York Times reported. Businesses want to bring back customers and profits. But workers now worry about contracting the coronavirus once they return to cramped restaurant kitchens, dental offices or conference rooms where few colleagues are wearing masks. Some states with a history of weaker labor protections are encouraging employers to report workers who do not return to their jobs, citing state laws that disqualify people from receiving unemployment checks if they refuse a reasonable offer of work. Oklahoma set up a “Return To Work” email address for businesses to report employees who turn down jobs. Ohio offered a similar way for employers to report coronavirus-related work refusals. Labor advocates and unions say the push to recall workers and kick reluctant employees off unemployment benefits carries grave risks in an age of coronavirus, when infections have rampaged through meatpacking plants, call centers, factories and other confined spaces where co-workers spend hours touching the same surfaces and breathing the same air.

Commentary: Pandemic Justifies Deferral of Post-Petition Retail Rent Payments*

In any retail bankruptcy proceeding, the obligations of a debtor to timely perform its post-petition obligations under the store leases is clear. But what happens during a global pandemic? The issue was recently addressed by the U.S. Bankruptcy Court for the Eastern District of Virginia in In re Pier 1 Imports, Case No. 20-30805-KRH (May 10, 2020), where the court was requested to allow the debtors to defer payments of post-petition rent for store locations, according to a commentary by Andrew Kassner and Joseph Argentina of Faegre Drinker Biddle & Reath in The Legal Intelligencer. The court granted this request and permitted the Pier 1 debtors to defer post-petition rent at many locations. Bankruptcy Court Judge Kevin R. Huennekens began by observing, “As the debtors aptly stated in the motion, the world has changed since the filing of these chapter 11 cases … no constituency in these cases predicted that the world would effectively grind to a halt. But, so it did.” The court further observed, “Thus, the debtor in the bankruptcy cases at bar, like other chapter 11 debtors throughout the nation, sought to find a way for their businesses to ‘shelter in place’ for a short duration while they determined whether and how to maximize value for their creditor constituents in light of a global pandemic.” Landlords expect post-petition rent to be paid timely, as provided by the Bankruptcy Code. It is clear that in this case, in the face of a global pandemic that caused “the world to grind to a halt,” the court took actions necessary to preserve value for all stakeholders, including the landlords. The question landlords will be asking in the coming months and years is this: Does this policy only apply in global pandemics, and if not, when will debtors be able to attempt to rely on the Pier 1 ruling to defer payment of post-petition rent, and for how long? Only time will tell, according to the commentary.



*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.

Fed Expands Municipal-Lending Facility to More Localities

The Federal Reserve said it would again broaden the number of local governments eligible for a new lending program as Illinois announced it would be the first borrower to access the facility, the Wall Street Journal reported. The central bank said yesterday that it would allow all 50 states to designate two cities or counties to sell debts directly to the central bank’s program, creating an option for states with less populous municipalities to participate. Many state and local governments are facing cash crises, as the coronavirus pandemic has crushed both their tax intake and driven an increase in their spending. The central bank also said state governors will be able to designate an additional two issuers whose revenues are derived from operating activities, such as airports, toll facilities, utilities or public transit, to be eligible to use the facility on their own. The changes could allow more than 380 issuers, up from around 260 before the latest changes, to access the emergency-lending program, which was first announced in April. So far, however, few have shown interest in borrowing through the Fed, which has positioned itself as a high-interest lender of last resort. Illinois is the first to tap the program. It is the country’s most indebted state. Illinois said that it would issue $1.2 billion in one-year notes on Friday to tide it over until income taxes arrive late in July. The state, which is rated just above junk status, is planning to borrow through the Fed at an interest rate of 3.82 percent. The rate is more than 10 times what one-year A-rated bonds were going for yesterday, according to Refinitiv.



In related news, coronavirus lockdowns have emptied arenas and stadiums indefinitely, shuttering professional sports and concert tours alike, and have significantly reduced tax revenue, the Wall Street Journal reported. When cities issue bonds and use the proceeds to build stadiums, they pledge to make yearly bond payments on the debt, often counting on revenue from sales, hotel or rental-car taxes to cover the payments. Public officials have borrowed billions of dollars to build stadiums for major teams. Since 2000, more than 40% of almost $17 billion in tax-exempt municipal bonds sold to finance major-league stadiums were backed by levies on hotels and rental cars — making tourism taxes the predominant means of public stadium finance, according to the Brookings Institution. The National League of Cities, an advocacy group, projects that American cities, towns and villages will experience a combined shortfall of roughly $360 billion through 2022, raising questions about decisions to allocate public money to sports franchises. (Subscription required.)

For Some Minority-Owned Businesses, Their Lenders Are Now Their Defenders

Community Development Financial Institutions (CDFIs) have come to the rescue of some minority-owned businesses through a combination of government funds and private donations to seed businesses that banks won’t deal with because they view their owners as too poor and too disconnected from the financial system to qualify for standard loans, the New York Times reported. Many CDFIs, which first came into existence in the early 1970s, evolved out of groups that were formed to help minorities recover from attacks — like the 1921 massacre of black Americans in Tulsa, Okla. — that have occurred regularly throughout America’s history. More recently, during the coronavirus pandemic, such groups have been the go-to lenders for minority business owners who could not find a bank to help them tap a federal government aid program. CDFIs, which are often nonprofits, offer their borrowers far more than just cash. They also walk them through the myriad kinds of paperwork required to get their businesses up and running, offer them management training and sometimes even provide spaces from which to launch. But the looting and damage that have marred protests in the past week have added a new set of tasks for many of these organizations, akin to those of a security guard or emergency workers. In places like Ferguson, Minneapolis and Wilmington, Del., where violent groups have destroyed property by smashing windows and setting fires, representatives from these lenders have been the first to make contact with devastated business owners and help organize their defense.

Commentary: The Next COVID-19 Relief Bill Should Include Student Debt Cancellation*

The CARES Act provided important temporary relief for student loan borrowers, permitting many with federally held debt to skip payments for 6 months, with borrowers generally given credit toward forgiveness for those payments. The legislation halted collections, though a significant number of borrowers were excluded. However, given the severity of the Covid-19 economic impacts, and the dire circumstances for many student loan borrowers, more comprehensive and long-term student debt relief is required to enable these families to recover, according to a Brookings Institute commentary. The impact of student debt cancellation would be surprisingly large, and the positive effects would reverberate throughout the economy. Beyond the individual impact of the student debt crisis, the adverse macroeconomic effects are widespread and well documented. Federal Reserve Chairman Jay Powell has, for several years, noted the adverse impacts on economic growth and called for student debt reform, including bankruptcy relief. In a recent analysis of the economic and fiscal impact of complete student loan cancellation (federal and private), and using conservative assumptions, researchers at the Levy Economics Institute simulated significant positive economic benefits in the form of increased GDP from increased household consumption and investment in the range of $86 billion to $108 billion per year over a 10-year period. Additionally, there would be significant social benefits from student loan cancellation, which studies have shown include increased family formation and stability, ability to pursue additional training, improved physical and mental health, increased entrepreneurial activity, and more.



*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.

Supply Chains, Safety Protocols Hobble U.S. Factories

Manufacturers emerging from weeks in hibernation during the coronavirus pandemic are accelerating production with jumbled supply chains and less efficient plants, making it harder to rebuild the weakened U.S. industrial sector, the Wall Street Journal reported. Some U.S. factories are looking for alternative suppliers to compensate for plants that remain closed or are overwhelmed by orders for items in high demand. Other companies say new protective equipment and procedures to add space between workers will weigh on their profits and productivity. Meanwhile, many manufacturers are encountering bleak conditions in industrial markets that have shrunken with the contracting U.S. economy. Durable-goods orders in the U.S. are at the lowest level in a decade, and surveys of purchasing managers at manufacturers in the U.S., Europe and Asia suggest any recovery in the months ahead could be tentative. (Subscription required.)

CFPB and State Regulators Provide Additional Guidance to Assist Borrowers Impacted by the COVID-19 Pandemic

The Consumer Financial Protection Bureau and the Conference of State Bank Supervisors issued joint guidance to mortgage servicers to assist in complying with the Coronavirus Aid, Relief and Economic Security (CARES) Act provisions granting a right to forbearance to consumers impacted by the COVID-19 pandemic, according to a CFPB press release. Servicers of federally backed mortgages, such as Fannie Mae or Freddie Mac, the Department of Housing and Urban Development, the Department of Veterans Affairs or the Department of Agriculture loans, must grant forbearance to borrowers with pandemic-related hardships that may last as long as two consecutive 180-day periods. Furthermore, additional interest, fees or penalties beyond the amounts scheduled or calculated should be waived with no negative impact to the borrower’s mortgage contract during the forbearance. Mortgage-servicers could violate the CARES Act or other applicable law and potentially cause consumer harm if they were to require documentation from borrowers to prove financial hardship, if they did not grant the forbearance once properly requested, or if they steered borrowers away from forbearance or misled them.

Central States Virtual Bankruptcy Workshop to Feature Great Sessions, Networking at an Affordable Price!

While ABI had to cancel its in-person Central States Bankruptcy Workshop for 2020 due to the COVID-19 pandemic, some of the sessions designed for this year's program are being converted into a two-day virtual experience, to be held June 25-26. With two online educational sessions each day of the conference, ample networking opportunities both days and a price that is right ($100 for the entire program), it is easy to include the Central States Virtual Bankruptcy Workshop in your schedule this year! Click here to register. 

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New on ABI’s Bankruptcy Blog Exchange: May Chapter 11 Bankruptcies Bolstered by Subsidiary Filings

Every petition filed by every subsidiary in a corporate group gets counted as a case, and the number of subsidiaries in a corporate group is arbitrary, thus one economic unit can generate what looks like many bankruptcy filings, according to a recent blog post.

Click here to read ABI’s May stats release.

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

 
© 2020 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

At Least 50 Temporary Judgeships Needed to Respond to Financial Distress of COVID-19 Pandemic, According to Bankruptcy Scholars

ABI Bankruptcy Brief

June 11, 2020

 
ABI Bankruptcy Brief
 
 
 
 
 
NEWS AND ANALYSIS

At Least 50 Temporary Judgeships Needed to Respond to Financial Distress of COVID-19 Pandemic, According to Bankruptcy Scholars

A group of bankruptcy scholars is calling for the appointment of at least 50 temporary bankruptcy judges to handle the onslaught of filings that could result from the COVID-19 pandemic, according to a letter sent to congressional leaders. The letter, signed by Prof. Jared Ellias of the University of California, Hastings College of Law, who chairs the Large Corporations Committee of the Bankruptcy & COVID-19 Working Group (comprised of law professors), urged Congress to (1) appoint additional temporary bankruptcy judges; (2) increase the budget that Congress provides bankruptcy judges to spend on operations and staff, including the support necessary for retired judges who are recalled and willing to serve; and (3) increase the number of U.S. Trustees appropriately. "An appropriate, conservative target would aim to quickly start the process to fill the minimum plausibly estimated need — 50 [judges] — and then revise the estimates as we see economic and bankruptcy developments," according to the letter, which was signed by 34 bankruptcy scholars.

U.S. Layoffs Easing, Labor Market Distress Persists

The number of Americans seeking jobless benefits fell last week, but millions laid off because of COVID-19 continue to receive unemployment checks, suggesting that the labor market could take years to heal from the pandemic even as hiring resumes, Reuters reported. The weekly jobless claims report from the Labor Department today followed news last Friday of a surprise 2.5 million increase in nonfarm payrolls in May. Initial claims for state unemployment benefits fell 355,000 to a seasonally adjusted 1.542 million for the week ended June 6. The 10th straight weekly decline pulled claims further away from a record 6.867 million in late March. Still, claims are more than double their peak during the 2007-09 Great Recession. Though the number of people staying on benefits is abating, the ranks of the unemployed are still uncomfortably large. The number of people receiving benefits after an initial week of aid fell 339,000 to 20.929 million for the week ended May 30. Continued claims, which are reported with a one-week lag, dropped from a record high of 24.912 million in early May.

Analysis: CARES Act's additional $600 in Weekly Unemployment Benefits Ends Next Month; Here’s What Lawmakers Are Proposing to Replace It

Americans who have been laid off from their jobs because of the coronavirus pandemic have been able to collect an additional $600 a week in unemployment benefits on top of what they get from their state through the CARES Act. But next month, if lawmakers fail to act, Americans who are out of work will see that $600 a week disappear from their unemployment checks, according to a MarketWatch.com analysis. The supplemental $600 Americans have been receiving has been controversial, especially given that two-thirds of laid-off workers have been receiving more money from their unemployment benefits than they did from their jobs. But at the same time, proponents of the extra $600 say that decreasing those benefits could cost the country even more jobs. As lawmakers consider a new round of stimulus funding, there are three proposals on the table for how to replace the extra $600:

Extending the Supplemental $600 Through Jan. 2021

Last month, the Democratic-run House passed the $3 trillion HEROES Act, which would, among other things, extend the extra $600 federal unemployment benefit to January 2021. The Congressional Budget Office found that if these benefits were extended through January 2021, an estimated five of every six recipients would receive more in benefits than they would from working those six months. Some have argued those generous benefits will keep people from seeking new jobs.

Sliding Scale of Unemployment Benefits Tied to State Unemployment Rates

Unlike the HEROES Act, one Democratic proposal that has bicameral support calls for additional unemployment benefits that are tied to state unemployment rates. The proposal, known as the Worker Relief and Security Act, which was proposed by Rep. Don Beyer (D-Va.), would allow Americans to continue to receive the additional $600 benefit for as long as the national emergency or state emergency for COVID-19 is in effect. Once the national or state emergency is terminated, jobless Americans would receive benefits based on their state’s unemployment level.

A Return-to-Work Bonus

Sen. Rob Portman (R-Ohio) is proposing a back-to-work bonus, which would provide an additional $450 a week for Americans who return to work. “Not only is the return-to-work bonus proposal the right policy in terms of incentivizing people to safely return to work and allowing businesses to reopen, but it could also benefit the American taxpayer through significant cost savings compared to the current money we’re spending on the CARES Act unemployment benefits,” Sen. Portman said.

U.S. Auto Suppliers Cheer as Carmakers Relaunch, but Long-Term Worries Remain

Auto parts suppliers across North America said they are encouraged as major automakers accelerate production after coronavirus pandemic shutdowns, but they are holding back on hiring and investment because of longer-term uncertainty, Reuters reported. U.S. automakers reopened most assembly plants in late May after states began loosening restrictions, and stronger-than-expected retail auto sales in May have automakers ramping up production of the highly profitable trucks and SUVs consumers are buying. However, several auto suppliers interviewed by Reuters worry about demand heading into 2021. U.S. and global auto sales are not expected to recover to pre-COVID-19 crisis levels until 2022 or 2023, Bank of America analyst John Murphy said today. Andreas Weller, CEO of aluminum parts maker Aludyne, sees very strong orders for July, but he laid off more than 10 percent of his workers because the days of Americans buying 17 million new vehicles a year will not return anytime soon. “What’s the market going to look like for the rest of the year, going into next year? That’s a bigger unknown,” he said. Magna International Inc. CEO Don Walker said that orders from automakers were good and the “big unknown” was how consumers respond. Other concerns include the potential for smaller parts makers to fail and bring production to a halt, and the possibility of another COVID-19 outbreak in the fall.

Auctioneers Race to Unload Oil Equipment as U.S. Drilling Dries Up

The oil industry auction market is more active now than at any point since the downturn of the 1980s, said Dan Kruse, a San Antonio-based auctioneer and founder of Superior Energy Auctions, which specializes in energy equipment, Reuters reported. Oil prices crashed this year, dropping at one point to -$37 a barrel. While the U.S. crude benchmark CLc1 has recovered to nearly $40 a barrel, U.S. and Canadian oil companies have slashed production by over 3 million barrels per day (bpd) and cut working rigs by nearly 800 from a year ago to just 305 in June, leaving a lot of idled equipment. Spending is down about 35% from the first quarter to the second. The cutbacks have prompted auctions from Odessa, Texas, to Alberta, Canada, where auctioneers like Highsmith are banging gavels to close deals on equipment. Even if oil prices remain in the high $30s, that will not be enough to spur much in the way of additional drilling. Ritchie Brothers, the biggest industrial auctioneer, conducted its largest-ever Texas auction in Fort Worth earlier this month, selling nearly 5,300 equipment items and trucks for over $81 million. Due to the coronavirus pandemic, the auction was held online, drawing 11,600 prospective buyers from 68 countries.

U.S. Households’ Net Worth Had Record Fall in First Quarter

The net worth of U.S. households saw a record decline in the first three months of this year as the coronavirus pandemic sent shock waves through the economy and caused equity prices to plummet, the Wall Street Journal reported. Household net worth fell 5.6 percent in the first quarter from the previous three months to a seasonally adjusted $110.79 trillion, the Federal Reserve said today. That was the largest single-quarter drop in records going back to the early 1950s. The figures, published in a quarterly Fed report known as Flow of Funds, show the beginning of the pandemic’s impact on the U.S. economy, which entered a recession in February. Gross domestic product contracted at an annualized rate of 5 percent in the January-to-March period, as lockdowns prompted consumers to reduce spending and companies to hold back investment. The downturn deepened in the second quarter, economists say, as companies and governments laid off more than 20 million people in April. Most of the decline in household net worth in the first quarter resulted from a $7.8 trillion drop in the value of directly and indirectly held corporate equities, the Fed said today. Fears about the virus and its impact on the economy, as well as a severe liquidity shortage in swaths of the financial system, caused the Dow Jones Industrial Average to fall some 23 percent in the first quarter, decimating household investment portfolios. (Subscription required.)

Upcoming abiLIVE Webinars to Examine Real Estate Industry, Automotive Landscape and Bankruptcy Court Procedures During COVID-19 Pandemic

ABI will be holding 3 webinars starting next week to examine financial distress in the real estate industry, automotive insolvency issues and how bankruptcy court procedures have evolved during the COVID-19 pandemic.

- June 17's "Post-Pandemic Real Estate Restructuring from Wall Street to Main Street" webinar features Saul Burian of Houlihan Lokey (New York), Megan Murray of Underwood Murray PA (Tampa, Fla.) and Michael Rosow of Winthrop & Weinstine, P.A (Minneapolis), with David Levy of NRC Realty & Capital Advisors, LLC (Chicago) moderating the panel. Register for free.

- Sponsored by the Federal Bar Associations of both the Eastern District of Michigan and Western District of Michigan, the "Automotive Insolvency Issues in the Post-COVID Age" webinar on June 18 features Bankruptcy Judge Phillip J. Shefferly (E.D. Mich.; Detroit), Bankruptcy Judge John T. Gregg (W.D. Mich.; Grand Rapids), Daniel F. Gosch of Dickinson Wright, PLLC (Grand Rapids, Mich.), Stephen M. Gross of McDonald Hopkins, PLC (Detroit), Richard E. Kruger of Jaffe Raitt Heuer & Weiss, P.C. (Southfield, Mich.) and Alicia B. Masse of Alderney Advisors (Southfield, Mich.). Register for free.

- Changes in the process and practice of bankruptcy courts in the COVID-19 era will be discussed on the June 22 webinar featuring Bankruptcy Judge Hannah L. Blumenstiel (N.D. Cal.; San Francisco), Clerk of the Court Una M. O'Boyle (D. Del., Wilmington), Brian L. Shaw of Fox Rothschild LLP (Chicago) and Matt Wapnick of CourtCall LLC (Los Angeles), with attorney Robert J. Ambrogi (Boston) moderating. Register for free.

SBRA, Consumer Hot Topics and More Featured at Central States Virtual Bankruptcy Workshop; Great Sessions, Networking at an Affordable Price from Your Home or Office!

While ABI had to cancel its in-person Central States Bankruptcy Workshop for 2020 due to the COVID-19 pandemic, sessions designed for this year’s program have been converted into a two-day virtual experience, to be held June 25-26. With two online educational sessions each day of the conference, ample networking opportunities both days and a price that is right ($100 for the entire program), it is easy to include the Central States Virtual Bankruptcy Workshop in your schedule this year! This year’s program sessions include:

• Small Business Restructuring Act of 2019
• Great Debates: The Ethical Response to Client Misconduct
• Hot Consumer Topics
• Liquidating Assets
• Judicial Round-and-Round

Click here to register.

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New on ABI’s Bankruptcy Blog Exchange: The Pandemic’s CRE Domino Effect

As revenue-starved retailers fall further behind on rent payments, landlords' cash flow will be strained and defaults on commercial real estate (CRE) loans could rise, according to a recent blog post.

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

 
© 2020 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

Mnuchin, Powell Defend Borrower Requirements Under Emergency Lending Programs

ABI Bankruptcy Brief

June 18, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

Mnuchin, Powell Defend Borrower Requirements Under Emergency Lending Programs

Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell defended policy choices to invest in debts of riskier companies through emergency lending programs, and to provide loans without conditions that firms maintain payroll, in a letter to congressional overseers released today, the Wall Street Journal reported. At issue is how the Fed and Treasury Department are managing funds from the CARES Act, a major emergency-relief bill Congress approved in March to help workers and businesses cope with the coronavirus pandemic. While Congress directed the Treasury to impose specific payroll requirements for forgivable loans to small businesses under the Paycheck Protection Program, it didn’t mandate a similar requirement for loans extended through Fed programs that are backed by up to $454 billion to cover losses. The Fed has stipulated that small and midsize businesses that accept loans funded by its Main Street Lending Program should make “commercially reasonable efforts” to maintain their payrolls, but the Fed hasn’t set specific requirements that prevent firms from shedding workers as they navigate a downturn caused by the coronavirus. The Fed indicated it is taking a long-term view in interpreting that standard, according to comments released today that agency leaders provided earlier this month to a congressional oversight panel.(Subscription required.)



In related news, Congress and the Trump administration, in their bid to funnel more than $650 billion in forgivable loans to small businesses struggling through the pandemic, delivered a program that didn’t work for many that needed it, according to a Wall Street Journal analysis. The Paycheck Protection Program (PPP) sped through Congress within the $2.2 trillion CARES Act stimulus package to address the economic distress caused by the pandemic, and opened for business on April 3, just two weeks after it was drafted. The government has approved 4.6 million loans worth more than $513 billion as of Tuesday. Those have reached a fraction of the 31.7 million small businesses in the U.S., a figure that includes 25.7 million firms without employees, according to the Small Business Administration. “They made a number of weak choices in designing the program as a loan program, when they wanted it to be a grant program,” said Josh Gotbaum, a former senior official at Treasury and the Office of Management and Budget who has worked for five administrations of both parties. Treasury Secretary Steven Mnuchin, whose department oversees the program along with the Small Business Administration, said, “If you want to do something at large scale that helps the economy, it can’t be perfect in every micro fashion,” given the urgency. “Had we waited another month to get the program up and running, we may not have had some of the issues that we had when we launched the program,” Mnuchin said. “On the other hand, had we waited another month, you wouldn’t have had people to be able to get loans as quickly.” (Subscription required.)

1.5 Million Workers Filed for Unemployment Insurance Last Week

An additional 1.5 million workers filed for unemployment insurance for the first time last week, a drop of just 58,000 claims from the week before, the Washington Post reported. Since the coronavirus pandemic began earlier this year, there have been 13 straight weeks where more than 1 million people have filed for unemployment for the first time. Another 760,000 people filed initial claims for Pandemic Unemployment Assistance, a supplemental program created by Congress for self-employed and gig workers. And the total number of people receiving benefits edged down slightly, to 20.5 million. More than 45 million people have filed for unemployment at some point during the pandemic.



In related news, a new proposal issued by a group of top economists calls on lawmakers to replace the expiring $600 unemployment supplement for jobless workers with a maximum $400 a week, CNBC.com reported. The proposal comes as Democrats and Republicans debate the merits of extending the $600 weekly enhancement to unemployment checks, which is scheduled to end after July 31. Democrats want to extend the $600 checks past July to avoid a severe drop in household income at a time when unemployment is likely to remain elevated. Republicans want to end the payments outright or replace them with a back-to-work bonus that pays Americans to find new jobs. The proposal, published on Tuesday by the Aspen Institute, attempts to assuage both parties. The policy would continue weekly aid at a reduced amount. It would also offer a payroll subsidy, either via an extra tax credit or “hiring bonus,” to incentivize workers to rejoin the workforce. The four authors are: Jason Furman, former chair of the Council of Economic Advisers under former President Barack Obama; Timothy Geithner, former Treasury secretary during the Obama administration; Glenn Hubbard, who chaired the Council of Economic Advisers under former President George W. Bush; and Melissa Kearney, director of the Aspen Institute’s Economic Strategy Group. The current $600-a-week federal supplement, created by the CARES Act, replaces more than 100 percent of lost wages for about two-thirds of American workers, according to economists at the University of Chicago.

FHFA Extends Moratorium on Evictions, Foreclosures for Two More Months

Federal foreclosure and eviction moratoriums set to expire at the end of June have been extended two months, a move aimed at helping homeowners and renters struggling financially because of the coronavirus pandemic, USA Today reported. Freddie Mac and Fannie Mae will extend the moratorium on foreclosures and evictions on single-family homes until at least Aug. 31, the Federal Housing Finance Agency said yesterday. The protections were scheduled to expire June 30. "During this national health emergency, no one should worry about losing their home," said Mark Calabria, director of the Federal Housing Finance Agency. The Department of Housing and Urban Development said yesterday that the Federal Housing Administration will extend its foreclosure and eviction moratorium through Aug. 31. This marked the second extension for the program after it began in March with a 60-day moratorium. It was extended until the end of June.

U.S. Retail Foot Traffic Rebounds, More Staff at Work as Lockdowns Ease

Retail foot traffic recovered to approach pre-lockdown levels last week, and businesses appeared to bring more employees back to the job, according to data from firms that collect cellphone location information and manage employee time for companies, Reuters reported. Cellphone data from Unacast showed that foot traffic at retail locations as of last Saturday was just 10 percent below the level of a year earlier. Similar foot-traffic estimates from Safegraph were over 90 percent of what they were on March 1, before a national state of emergency was declared and widespread lockdowns were imposed to curb the spread of the new coronavirus.

Commentary: If Zombie Companies Don't Die, We'll Pay a Price*

The Federal Reserve this week began buying individual corporate bonds, in addition to the bond exchange-traded funds it has bought already. Meanwhile, its Main Street Lending program has begun buying loans that banks make to small and medium-sized businesses at the Fed’s behest. These are in addition to a variety of other lending programs, all designed to keep corporate America afloat until the coronavirus pandemic passes, according to a Bloomberg commentary. And there’s evidence that these programs are having their intended effect: There has been no large wave of commercial bankruptcies so far. But there’s a growing worry in some quarters that all of this lending will create a wave of zombie companies (businesses that have to borrow to survive and don’t make enough profit to cover debt-service costs). The number of such companies has been increasing steadily in developed nations during the past 20 years, according to the commentary. The reason, presumably, is low interest rates, which allow zombies to sustain themselves on borrowed money rather than exit the market. In a healthy economy, bad companies die and good companies replace them, and new industries rise while old ones fade. But if the Fed keeps all of the bad companies on life support, neither of those necessary processes can happen, according to the commentary. If the moratorium on creative destruction lasts only a year, until COVID-19 is eliminated by treatments or vaccines, the amount of resource misallocation will probably not be too bad. The danger is if unprofitable companies are supported for years. The minute the Fed cuts off the spigot of cheap money, those companies and industries will shed workers and reduce investment, putting the economy in danger, according to the commentary. Until the pandemic is over, the Fed shouldn’t let up on its lending programs. But it would be useful to have a concrete plan for how to clear out the corporate deadwood once the coronavirus is no longer a threat.



*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.

New Home-Equity Lines of Credit Declined After Pandemic Hit as Lenders Tightened Standards

Millions of Americans are out of work, but for many, tapping their home equity isn’t an option, the Wall Street Journal reported. New home-equity lines of credit dropped 19 percent from March through May compared with the same time last year, according to preliminary data from credit-reporting firm Equifax Inc. Many lenders are getting stricter about offering the credit lines, known as HELOCs. Both JPMorgan Chase & Co. and Wells Fargo & Co. have temporarily stopped accepting new HELOC applications, and other lenders have tightened standards. U.S. banks’ holdings of home-equity lines of credit were down more than 9 percent from a year earlier as of early June, the largest decline on record, according to Federal Reserve data. Originations of home-equity loans, another popular way for borrowers to pull cash out of their homes, fell 43 percent from March through May, according to Equifax. (Subscription required.)

Many Delayed Medical Care Out of Fear of COVID-19, but Unemployment Is Now Making Care Unaffordable

While hospitals and doctors across the country say many patients are still shunning their services out of fear of COVID-19 — especially with new cases spiking — Americans who lost their jobs or have a significant drop in income because of the pandemic are now citing costs as the overriding reason they have not been seeking the health care they need, the New York Times reported.“We are seeing the financial pressure hit,” said Dr. Bijoy Telivala, a cancer specialist in Jacksonville, Fla. “This is a real worry,” he added, explaining that people are weighing putting food on the table against their need for care. The twin risks in this crisis — potential infection and the cost of medical care — have become daunting realities for the millions of workers who were furloughed, laid off or caught in the economic downturn. It echoes the scenarios that played out after the 2008 recession, when millions of Americans were unemployed and unable to afford even routine visits to the doctor for themselves or their children. Nearly half of all Americans say they or someone they live with has delayed care since the onslaught of coronavirus, according to a survey last month from the Kaiser Family Foundation. While most of those individuals expected to receive care within the next three months, about a third said they planned to wait longer or not seek it at all.

Latest ABI Podcast Examines Supreme Court Decision on Puerto Rico Oversight and Management Board

ABI Editor-at-Large Bill Rochelle spoke with experts about the June 1 decision by the Supreme Court that the appointment of the Puerto Rico Oversight Board did not violate the Appointments Clause. Prof. Stephen Lubben, the Harvey Washington Wiley Chair in Corporate Governance & Business Ethics at Seton Hall (Newark, N.J.); Prof. Juliet Moringiello, Associate Dean for Research and Faculty Development and Professor of Law at Widener University Commonwealth Law School (Harrisburg, Pa.); and Zachary Smith of Moore & Van Allen (Charlotte, N.C.), who has been involved in restructuring matters pertaining to Puerto Rico, joined Rochelle to examine the decision.

Monday: abiLIVE Webinar to Examine Bankruptcy Court Procedures During COVID-19 Pandemic

ABI will be holding a special abiLIVE webinar on Monday looking at changes in the process and practice of bankruptcy courts in the COVID-19 era. Speakers on the webinar will include Bankruptcy Judge Hannah L. Blumenstiel (N.D. Cal.; San Francisco), Clerk of the Court Una M. O'Boyle (D. Del., Wilmington), Brian L. Shaw of Fox Rothschild LLP (Chicago) and Matt Wapnick of CourtCall LLC (Los Angeles), with attorney Robert J. Ambrogi (Boston) moderating. Register for free.

SBRA, Consumer Hot Topics and More Featured at Central States Virtual Bankruptcy Workshop; Great Sessions, Networking at an Affordable Price from Your Home or Office!

While ABI had to cancel its in-person Central States Bankruptcy Workshop for 2020 due to the COVID-19 pandemic, sessions designed for this year’s program have been converted into a two-day virtual experience, to be held June 25-26. With two online educational sessions each day of the conference, ample networking opportunities both days and a price that is right ($100 for the entire program), it is easy to include the Central States Virtual Bankruptcy Workshop in your schedule this year! This year’s program sessions include:

• Small Business Restructuring Act of 2019
• Great Debates: The Ethical Response to Client Misconduct
• Hot Consumer Topics
• Liquidating Assets
• Judicial Round-and-Round

Click here to register.

Sign up Today to Receive Rochelle’s Daily Wire by E-mail!
Have you signed up for Rochelle’s Daily Wire in the ABI Newsroom? Receive Bill Rochelle’s exclusive perspectives and analyses of important case decisions via e-mail!

Tap into Rochelle’s Daily Wire via the ABI Newsroom and Twitter!

BLOG EXCHANGE

New on ABI’s Bankruptcy Blog Exchange: The Pandemic’s CRE Domino Effect

As revenue-starved retailers fall further behind on rent payments, landlords' cash flow will be strained and defaults on commercial real estate (CRE) loans could rise, according to a recent blog post.

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

 
© 2020 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

Unemployment Claims at Nearly 1.5 Million in Latest Week

ABI Bankruptcy Brief

June 25, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

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.

Next Wednesday's Happy Hour Starts at 5 p.m. ET! RSVP and Bring a Colleague!

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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Alexandria, VA 22314
 

Analysis: Reports of a “Debtor Bar” for PPP Loans Have Been “Exaggerated”

ABI Bankruptcy Brief

July 2, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

Analysis: Reports of a “Debtor Bar” for PPP Loans Have Been “Exaggerated”

by Thomas J. Salerno Stinson, LLP (Phoenix)

In my learned colleague Bill Rochelle’s June 24 Rochelle’s Daily Wire, the headline blares, “Fifth Circuit Bars Debtors from Receiving ‘PPP’ Loans Under the CARES Act.” Bill’s headline is not unique; many law firm blogs have been reporting the same thing. Yet as my good colleague acknowledged, the headline (while certainly eye-catching, as headlines are wont to be) fails to tell the whole story. As reported accurately by Bill Rochelle: “In record time, the Fifth Circuit granted a direct appeal and reversed the bankruptcy court on June 22, ruling that the Small Business Act bars the bankruptcy court from entering an injunction that requires the Small Business Administration to grant a so-called PPP loan to a company in bankruptcy.” While the Paycheck Protection Program (PPP) was set to expire on June 30, that very night the Senate introduced legislation to extend it another six weeks, as there is a whopping undisbursed $130 billion still left in the federal giveaway grab bag. The House voted on July 1 to approve the extension to Aug. 8. The June 22, 2020, three-page decision by the Fifth Circuit did not hold that debtors were barred from the PPP Loan program, nor did the Fifth Circuit give judicial blessing to the now infamous April 24, 2020, regulation promulgated by the Small Business Administration (SBA) that automatically disqualified debtors from participating in the PPP (the “SBA Bankruptcy Rule”). Rather, the court ruled on the very narrow issue of whether the bankruptcy court in Hidalgo (the first court in the country to issue the injunction in question) could enjoin the SBA. As stated by the Fifth Circuit: “The issue at hand is not the validity or wisdom of the PPP regulations and related statutes, but the ability of a court to enjoin the Administrator, whether in regard to the PPP or any other circumstance. Because, under well-established Fifth Circuit law, the bankruptcy court exceeded its authority when it issued an injunction against the SBA Administrator, we VACATE its preliminary injunction.” 

U.S. Unemployment Rate Decreased to 11.1 Percent in June

The jobless rate fell to 11.1 percent in June as the U.S. regained 4.8 million jobs, continuing a labor market rebound from the economic shock caused by the coronavirus pandemic, the Wall Street Journal reported. Job growth in June followed May’s payroll gain of 2.7 million and showed that people are getting back to work faster than anticipated. Still, the U.S. labor market is operating with about 15 million fewer jobs than in February, the month before the pandemic struck the U.S. economy, and a recent coronavirus rise could hamper the job market’s recovery. The June unemployment rate was down from 13.3 percent in May, even though there were significantly more workers who were accurately counted as unemployed in June compared with previous surveys during the pandemic, according to the Labor Department. The jobless rate is still at historically high levels. Until March, before the coronavirus drove the U.S. into a deep recession, the unemployment rate had been hovering at around a 50-year low of 3.5 percent. Some states are reversing or pausing reopening plans as coronavirus infections surge in the South and West. Today’s jobs report, which is based on survey data largely collected in mid-June, doesn’t reflect those recent government-mandated business closures and related layoffs. Employers in sectors such as retail, health care and manufacturing added jobs in June. Companies recalled workers who were temporarily laid off due to the pandemic, helping drive down the number of unemployed Americans on temporary layoff by about 5 million from May to June. Meanwhile, the number who permanently lost their jobs increased by about 600,000 over that period. (Subscription required.)



In a separate Department of Labor report, an additional 1.427 million Americans filed for unemployment benefits in the week ending June 27, YahooFinance.com reported. The prior week’s figure was revised slightly higher to 1.482 million from the previously reported 1.480 million. Weekly jobless claims have decelerated for 13 consecutive weeks; however, more than 48 million Americans have filed for unemployment insurance over the past 15 weeks. Closely watched continuing claims, which lag behind initial jobless claims data by one week, totaled 19.29 during the week ending June 20, up from 19.23 million in the prior week. Pandemic Unemployment Assistance (PUA) program claims, which include those who were previously ineligible for unemployment insurance such as self-employed and contracted workers, were also closely monitored in today’s report. PUA claims totaled 839,563 on an unadjusted basis in the week ending June 27, down from the prior week’s 881,242.

Senate Democrats Offer Plan to Extend Added Jobless Benefits During Pandemic

Senate Democrats yesterday unveiled legislation to extend a generous federal increase of weekly unemployment benefits that would continue as long as the coronavirus pandemic affects the economy, The Hill reported. The American Workforce Rescue Act, introduced by Senate Democratic Leader Charles Schumer (N.Y.) and Senate Finance Committee ranking member Ron Wyden (D-Ore.), would extend the $600 federal increase in weekly unemployment benefits beyond July 31, when the current federal enhancement of benefits is due to expire. That initial federal boost to weekly state unemployment benefits was included in the CARES Act signed into law in late March, but it has come under fierce criticism from Republicans, who say the benefit is so generous that it has created a disincentive for workers to return to low- and middle-income jobs. The Schumer-Wyden proposal would extend the $600 increase in weekly unemployment insurance (UI) benefits past July 31 until a time when a state’s three-month average total unemployment rate falls below 11 percent. The federal benefit would drop from $600 a week by $100 for every percentage point decrease in the state’s unemployment rate, until that rate falls below 6 percent, according to a summary of the proposal provided by their offices.

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Fed Officials Raised Concerns in June that U.S. Could Enter a Much Worse Recession Later this Year if Coronavirus Cases Continued to Surge

Federal Reserve officials raised concerns about additional waves of coronavirus infections disrupting economic recovery and triggering a new spike in unemployment and a worse economic downturn, according to minutes released yesterday by the central bank about its June 9-10 meeting, the Washington Post reported. Fed Chair Jerome H. Powell has repeatedly said that the path out of this recession, which began in February, will depend on containing the virus and giving Americans the confidence to resume normal working and spending habits. But the notes from the two-day meeting reveal how interconnected Fed officials view a prolonged economic recession and the pandemic’s continued spread — and why Powell often asserts that lawmakers will need to do more to carry millions of Americans out of this crisis. “In light of the significant uncertainty and downside risks associated with the pandemic, including how much the economy would weaken and how long it would take to recover, the staff judged that a more pessimistic projection was no less plausible than the baseline forecast,” the minutes read. “In this scenario, a second wave of the coronavirus outbreak, with another round of strict limitations on social interactions and business operations, was assumed to begin later this year, leading to a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year.”

Analysis: Companies Hit by COVID-19 Want Insurance Payouts; Insurers Say No

A cavalcade of restaurateurs, retailers and others hurt by pandemic shutdowns have sued to force their insurers to cover billions in business losses, the Wall Street Journal reported. Millions of businesses across the U.S. carry “business interruption” insurance. The pandemic, no question, interrupted their businesses. But insurance companies have largely refused to pay claims under this coverage, citing a standard requirement for physical damage. That is a legacy of its origins in the early 1900s as part of property insurance protecting manufacturers from broken boilers or other failing equipment that closed factories. The insurance is also known as “business income” coverage. More than half of property policies in force today specifically exclude viruses, although the firms filing the lawsuits mostly hold policies without that exclusion. Their argument for getting around the physical-damage requirement is that the coronavirus sticks to surfaces and renders workplaces unsafe. Lawyers have found past rulings that say events rendering a property unusable may constitute property damage. Hundreds of lawsuits have been filed, and lawyers anticipate many more. Some plaintiffs’ lawyers speculate the issue could deal losses to insurers rivaling their liability from asbestos litigation about 30 years ago, which was about $100 billion, according to A.M. Best Co. A Wells Fargo Securities analyst puts insurers’ worst-case business-interruption liability at $25 billion, which would match losses from some Category 5 hurricanes. (Subscription required.)

U.S. Farmers Scramble for Help as COVID-19 Scuttles Immigrant Workforce

The novel coronavirus delayed the arrival of seasonal immigrants who normally help harvest U.S. wheat, leaving farmers to depend on high school students, school bus drivers, laid-off oilfield workers and others to run machines that bring in the crop, Reuters reported. As combines work their way north from the Southern Plains of Texas and Oklahoma, farmers and harvesting companies are having a harder time finding and keeping workers. Any delays in the harvest could send wheat prices higher and cause a scramble to secure supplies to make bread and pasta. The United States is the world’s No. 3 exporter of wheat, a crop in high demand during the pandemic. A sustained labor shortage could further impact the soy and corn harvests that start in September. Farmers, who have been loyal supporters of U.S. President Donald Trump, have grown more reliant on immigrant labor in recent years. The Trump administration continues to issue agriculture visas while clamping down on tech workers, students and other groups. Custom harvesters, or companies hired to gather crops by small-scale farmers who do not own their own equipment, also employ migrants. They roll up to a thousand combines across the U.S. Great Plains and Midwest at harvest time, handling about 30 percent of the U.S. wheat crop. The number of H-2A visas granted for agriculture equipment operators rose to 10,798 from October through March, the typical hiring period for harvesters looking for a labor force that starts cutting wheat in May. That was up 49 percent from a year earlier, according to the U.S. Labor Department. But many of those workers were unable to make it to the United States by the time the harvesters set off on their annual trek, according to eight harvesting companies and farmers interviewed by Reuters. Travel restrictions, tighter border controls and virus fears around the globe have led to delays in workers getting out of their home countries.

Coronavirus Surge Strains Municipal Bond Market, but Investors Still Pile In

The recent surge in COVID-19 cases has brought more bad news for a municipal bond market already reeling from the impact of coast-to-coast shutdowns and record unemployment, the Wall Street Journal reported. The U.S. Virgin Islands Water and Power Authority yesterday narrowly avoided default. The utility got a badly needed reprieve when Chicago-based Nuveen LLC agreed to accept a $34 million payment due Wednesday on Aug. 31 instead. Analysts question whether the territory has enough money on hand to make the payment. The territory isn’t alone in facing pressure. Ten municipal borrowers defaulted for the first time in May and another 10 did in June, the highest for those months since 2012, when borrowers were still absorbing hits from the 2008 financial crisis, according to Municipal Market Analytics data. Many municipal borrowers are being crushed by the massive falloff in the collection of sales, income and hotel taxes, airport fees and other revenues. Even some investment-grade issuers are showing signs of serious strain in their abilities to pay future debts. Despite the pressure on issuers, some investors are seeing opportunity rather than a reason for panic. Even with coronavirus losses weighing heavily on the roughly $4 trillion municipal market, investors are piling back into municipal debt, hungry for yield and seeking more safety than the stock market can provide. Many fled munis in droves when the U.S. first shut down in March, but investors seem to have overcome their initial fears and have plowed about $11 billion back into muni mutual funds since mid-May, more than one-third of the amount withdrawn in March and early April, according to Refinitiv. (Subscription required.)

Where Can You Earn Up to 5.1 Hours of CLE, Including 1.2 Hours of Ethics, for Just $100? At ABI’s Southeast Virtual Bankruptcy Workshop!

The 2020 Southeast Virtual Bankruptcy Workshop on July 24 provides you with an innovative online program bringing together regional judges and top practitioners for an afternoon of interactive and informative programming. Earn up to 5.1 hours of CLE credit, including 1.2 hours of ethics, and engage in valuable networking with regional colleagues — all from the comfort of your home — for only $100. Register here.

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New on ABI’s Bankruptcy Blog Exchange: How COVID-19 Could Alter the Regulatory Landscape

The 2008 financial crisis transformed banking regulations. A recent blog post examines how those changes have held up in the current recession, and what might be coming next amid the COVID-19 economic downturn.

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

 
© 2020 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

U.S. Weekly Jobless Claims Fall; But a Record 32.9 Million on Unemployment Benefits

ABI Bankruptcy Brief

July 9, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

U.S. Weekly Jobless Claims Fall; But a Record 32.9 Million on Unemployment Benefits

New applications for U.S. jobless benefits fell last week, but a record 32.9 million Americans were collecting unemployment checks in the third week of June, Reuters reported. Economists cautioned against reading too much into the drop in weekly jobless claims reported by the Labor Department on Thursday, noting that the period included the July 4 Independence Day. Claims data are volatile around holidays. Large parts of the country, including densely populated states like Florida, Texas and California, are dealing with record spikes of new COVID-19 cases, which have forced a scaling back or pausing of reopenings and sent some workers home again. Initial claims for state unemployment benefits dropped 99,000 to a seasonally adjusted 1.314 million for the week ended July 4. That was the 14th straight weekly decline. The number of people receiving benefits after an initial week of aid dipped 698,000 to 18.062 million in the week ending June 27. These so-called continued claims, which are reported with a one-week lag, topped out at a record 24.912 million in early May. There were 32.9 million people receiving unemployment checks under all programs in the third week of June, up 1.411 million from the middle of the month.

White House Expects New Round of Stimulus Funds to Individuals by End of July

Treasury Secretary Steven Mnuchin said today that the Trump administration is working with the Senate to pass a new bill for coronavirus-related economic aid by the end of July, as enhanced unemployment benefits near expiration, the Wall Street Journal reported. Mnuchin said the administration supports a second round of so-called economic impact payments to households, an extension of enhanced unemployment benefits for furloughed workers, and a “much, much more targeted” version of the Paycheck Protection Program of forgivable loans for small businesses. “As soon as the Senate gets back, we’re going to sit down on a bipartisan basis with the Republicans and the Democrats, and it will be our priority to make sure between the 20th and the end of the month that we pass the next legislation,” Mnuchin said. House Democrats in May passed a $3.5 trillion bill that would extend the $600 in extra weekly unemployment payments through December, send households more stimulus checks and provide $1 trillion to state and local governments whose revenues have been hit by the pandemic. Senate Republicans have postponed deliberations on the next round of stimulus until July 20, leaving little time to reach a consensus before the unemployment supplement expires. Republican leaders have expressed concern that enhanced jobless benefits discourage people from returning to work as the economy reopens. “We knew there was a problem with the enhanced unemployment in that [in] certain cases, people were paid more than they made in their jobs,” Mnuchin said, adding that he hoped to cap the next round of benefits at 100 percent of a worker’s original income. Weekly unemployment benefits normally average less than $400 a week. Mnuchin indicated that the next round of extra benefits might be aimed at workers in industries hardest hit by the coronavirus pandemic and resulting lockdowns. (Subscription required.)

Renters Face Financial Cliff Ahead; Limited Help Available

People who rent have largely been able to survive the initial months of the pandemic helped by unemployment and federal relief checks. But the extra $600 in unemployment benefits ceases at the end of July and local eviction moratoriums are expiring, the Associated Press reported. There is no agreement between the White House and Congress on a second federal relief package. More broadly, there are fewer supports in place for renters than for homeowners. And as a jump in virus cases in numerous states nationwide adds more uncertainty to the economy and job market, many who rent are facing a precarious future. “It’s an incredibly stressful situation for renters,” said Bruce McClary, spokesman for the National Foundation for Credit Counseling, a nonprofit that works directly with consumers. “I don’t know what lies in the road ahead.” Renters already faced a dire situation before the pandemic hit, said Alexander Hermann, a researcher at the Harvard Joint Center for Housing Studies. The center reported in January that vacancy rates for rentals had hit the lowest level in decades, pushing up rent far faster than income. At last count, one in four renters spent more than half their income on housing. Then came the pandemic, which hit renters particularly hard financially. U.S. Census data shows about 19% of renters were late or deferred their rent payments in May. And about 31 percent of renters surveyed in June said they have little to no confidence they will be able to pay next month’s rent.

Service Sector in U.S. Shows Signs of Recovery

U.S. services industries showed signs of recovery in June as businesses took early steps to reopen following the easing of some of the coronavirus-related lockdowns, according to two surveys of purchasing managers released on Monday, the Wall Street Journal reported. But analysts warned those gains could be undone in July as a resurgence of cases in some states leads to another shutdown of businesses. Businesses in both surveys reported last month that demand had started to stabilize and that exports were starting to pick up. The pace of job cuts slowed with some companies starting to hire again. Prices rose, another sign of renewed demand. Survey respondents also said they were increasingly optimistic about the outlook, even though overall business confidence remains subdued. An index of service activity compiled by data firm IHS Markit registered 47.9 in June, up from 37.5 in May. The reading suggests that while economic activity in the U.S. services sector continues to contract, it is doing so at a slower pace. Readings of 50 or above are a sign of expansion while readings below 50 signal contractions. A separate index compiled by the Institute for Supply Management posted 57.1 in June, the first month-over-month expansion following two straight months of contraction. The service sector, especially the hospitality and accommodation industry, was hard-hit by the shutdowns this spring. Private service employers shed 17.4 million jobs in April before clawing back 2.5 million in May and another 4.3 million June, according to the Labor Department. (Subscription required.)

Consumer Borrowing in May Decreased for Third Consecutive Month Amid Pandemic

U.S. consumers reduced their borrowing for a third-straight month in May as the millions of jobs lost because of the coronavirus pandemic made households less eager to take on new debt, the Associated Press reported. The Federal Reserve reported yesterday that consumer borrowing declined by $18.3 billion in May, a drop of 5.3 percent. Borrowing had fallen 4.5 percent in March and then plunged 20.1 percent in April. That was the biggest one-month decline in percentage terms since the end of World War II. Borrowing by consumers in the category that covers credit card debt fell $24.3 billion in May after April's record $58.2 billion decline. Borrowing in the category that covers auto loans and student debt rose $6 billion, reversing part of a $12 billion decline in April. The Trump administration is forecasting a sharp rebound in the July-September quarter but private economists are worried that the resurgence of coronavirus cases in recent weeks in many areas may put the recovery at risk. It marked the first time in a decade that overall consumer borrowing has fallen for three straight months. The declines left total borrowing at a seasonally adjusted $4.11 trillion in May.

Commentary: Apollo’s Debt-Lawsuit Defeat to Reshape Wall Street Risk Models*

When Apollo Global Management Inc. and its allies sued struggling mattress maker Serta Simmons Bedding for giving an unfair advantage to creditors providing fresh cash, many on Wall Street snickered, according to a Bloomberg commentary. But when the private equity giant and partners including Angelo Gordon & Co. lost the lawsuit, the snickering stopped. The ruling could turn the Serta Simmons transaction into a playbook for restructuring debt that undermines a central tenet of credit markets and hands distressed borrowers a source of leverage over lenders, just as the pandemic sparks a surge in showdowns between the two sides, according to the commentary. If creditors can now be pushed down the repayment pecking order without notice and have no recourse to fight back, they will be forced to reassess risk — and potentially demand higher interest rates — when granting loans and buying certain kinds of bonds. The Serta Simmons deal was “particularly aggressive,” said Elisabeth de Fontenay, a professor at Duke University School of Law and a former corporate lawyer. “You could absolutely see it being a big problem for credit markets.”



*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.

Fed’s $600 Billion Lending Program Will See More Interest if Economy Slumps, Official Says

The Federal Reserve’s $600 billion lending program for medium-size businesses hasn’t attracted much interest yet, but that is likely to change if the U.S. economy takes a turn for the worse amid rising coronavirus cases, said the official who runs the program, the Wall Street Journal reported. “The likelihood that we continue to have serious problems with the infections means that businesses are likely to be disrupted for a longer period of time,” said Eric Rosengren, president of the Federal Reserve Bank of Boston. “So there’s an insurance element against the pandemic, as well as meeting an immediate need of some borrowers.” The Main Street Lending Program aims to lend to companies contending with the economic fallout from the pandemic, but it has struggled to get off the ground since it was announced in April. Its rollout was held up by negotiations over terms, while bankers have expressed skepticism that many borrowers that need help will be eligible to access the loans. Of the five largest U.S. banks by assets, only Bank of America Corp. has indicated that it plans to make Main Street loans available to new customers. Three others — Wells Fargo & Co., Citigroup Inc. and U.S. Bancorp. — said they plan only to serve existing customers. JPMorgan Chase & Co. didn’t say whether it planned to lend to new customers through the program. Almost 11,000 federally insured banks and credit unions could be eligible. Rosengren said that 260 lenders have completed the registration process, while another 174 are still signing up. He acknowledged that it is “going to take some time for banks and borrowers to become familiar with the program” but that he fully expects demand to pick up. (Subscription required.)

Upcoming abiLIVE Webinars Look at Evolution of Consumer Bankruptcy Practice in the COVID-19 Era, Distressed Debt Market Trends and Evolving M&A Activity

Three upcoming abiLIVE webinars present experts looking at key issues to both consumer and business bankruptcy practice:

- Sponsored by ABI's Consumer Bankruptcy Committee, the "Evolution of Consumer Bankruptcy Practice in the COVID-19 Era" abiLIVE webinar on July 17 will look at what trends for consumer bankruptcy practice have emerged during the COVID-19 pandemic and what consumer practice will look like going forward. Featured speakers include John Crane of Robertson, Anschutz, Schneid & Crane LLC (Duluth, Ga.), Jenny L. Doling of J. Doling Law, PC (Palm Desert, CA) and Charissa Potts of Freedom Law PC (Eastpointe, Mich.) with chapter 13 trustee Margaret A. Burks (Cincinnati) serving as moderator. Register here for free.

- SRS Acquiom will sponsor a special abiLIVE roundtable on Distressed Debt Market Trends on July 21. The discussion on current trends will include how we got here, what we're seeing, and how today's market compares to other distressed times. Experts will also provide their viewpoints on how COVID-19 is turning lending markets upside-down, and provide tips on how best to respond to the challenging times. Speakers include Harrison Denman of White & Case LLP (New York), Thomas Finnigan, IV, of White Oak Financial, LLC (San Francisco), Samantha Good of Kirkland & Ellis LLP (San Francisco), Renee Kuhl of SRS Acquiom (Minneapolis), Eric McDonald of SRS Acquiom (New Orleans) and Paul St. Mauro Seaport Global Securities LLC (New York). Register here for free.

- Sponsored by Prosakuer, the "Evolving Landscape of Distressed M&A Activity" abiLIVE webinar on July 22 will highlight the current challenges facing insolvency professionals working on deals in the COVID-19 world and what to expect in the coming months. Featured speakers include Harold Bordwin of Keen-Summit (New York), Jeff Marwil of Proskauer (Chicago) and Rich Morgner of Jeffries (New York). Register here for free.

Sign up Today to Receive Rochelle’s Daily Wire by E-mail!
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New on ABI’s Bankruptcy Blog Exchange: CFPB Declares Most Agency Rules Still Valid after Supreme Court Decision

The agency sought to provide certainty that most actions from the past eight years remain in effect despite the ruling that the bureau's leadership structure is unconstitutional, according to a recent blog post.

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

 
© 2020 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

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