Bankruptcy Brief

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.

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Analysis: A New Challenge for Debtors Who Received PPP Loans Under the CARES Act

The CARES Act and corresponding paycheck protection program (PPP) provisions continue to provide fertile ground for discourse concerning policy implications and legislative intent amid an unprecedented pandemic, according to an analysis by David M. Barlow of the U.S. Bankruptcy Court for the District of Arizona in Phoenix. In the early months of implementing the CARES Act’s PPP provisions, the bankruptcy world was particularly fraught with such debate. Courts across the country grappled with the SBA’s authority to enforce rules prohibiting access to the $659 billion of relief afforded to small businesses solely based on their status as debtors in bankruptcy. Although that phase of litigation appears to have concluded, debtors who received PPP loans and are now seeking loan forgiveness may need to clear a new hurdle. Specifically, lenders of the PPP loans may refuse to process a borrower’s application for loan forgiveness because the applicant’s filing of bankruptcy constituted a default under the terms contained in the PPP loans. Despite going to a lot of places and engaging in what has affectionately been referred to by one commentator as the “SBA Tango,” debtors may end up somewhere they have already been: in front of a bankruptcy court seeking the relief necessary to have their PPP loan forgiven.

U.S. Economy Contracted at Fastest Quarterly Rate on Record from April to June as Coronavirus Walloped Workers, Businesses

The U.S. economy shrank 9.5 percent from April through June, the largest quarterly decline since the government began publishing data 70 years ago and the latest, sobering reflection of the pandemic’s economic devastation, the Washington Post reported. The second quarter report on gross domestic product covers some of the economy’s worst weeks in living memory, when commercial activity ground to a halt, millions of Americans lost their jobs and the nation went into lockdown. Yet economists say the data should also serve as a cautionary tale for what is at stake if the recovery slips away, especially as rising coronavirus cases in some states have forced businesses to close once again. On Thursday, the government also reported that jobless claims increased once again last week to 1.4 million, another sign any recovery is stalling out. GDP shrank at an annual rate of 32.9 percent, according to the Bureau of Economic Analysis. While it usually stresses the annualized rate, that figure is less useful this quarter because the economy is unlikely to experience another collapse like it did in the second quarter. Still, while a tailspin at the second quarter rate is unlikely, the nascent recovery that began appearing earlier this summer appears to be in jeopardy. On Wednesday, Federal Reserve Chair Jerome H. Powell warned that the most recent surge in infections has begun to weigh on the economy, while reemphasizing a recovery cannot be sustained unless the virus is under control.

Republican Stimulus Package May Come with a Benefit for Big Banks

Big banks may get a big gift in the stimulus bill being drafted by Senate Republicans, the New York Times reported. Lawmakers are expected to include language that would give the Federal Reserve authority to relax a requirement surrounding capital levels at the biggest banks, essentially allowing firms to load up on riskier assets. The push is the culmination of a months-long effort by industry lobbyists and a top Federal Reserve official to change a restriction put in place in the wake of the 2008 financial crisis to prevent banks from engaging in risky behavior. Sen. Mike Crapo (R-Idaho), chairman of the Senate Banking Committee, is working on legislation that would give regulators the discretion to let banks exclude certain items on their balance sheets when calculating how much capital they are required to hold. The change could allow banks to be less conservative in their risk-taking than in recent years. It could be particularly useful for banks with large Wall Street trading operations, because it would let them increase their holdings of certain kinds of financial assets, like government bonds, without requiring a corresponding increase in capital reserves. Critics, however, say the leverage ratio is blunt, because it in effect views U.S. government bonds as risky as, say, credit card loans. But backers of the leverage ratio say there are times when even the safest assets can be risky for banks to own. There was evidence for this during the turmoil in the markets in March, when Treasuries were sold off, a major reason the Fed stepped in to support markets.

Fannie, Freddie Earnings Improve Amid Signs of Housing-Market Recovery

Government-controlled mortgage giants Fannie Mae and Freddie Mac said their earnings improved in the second quarter, adding to evidence of a rebound in the U.S. housing market, the Wall Street Journal reported. Fannie Mae, the larger of the two companies, said 5.7% of the single-family loans it guarantees — representing about 972,000 mortgages — had suspended payments as of June 30, down from the 7% it reported May 1, when it released first-quarter earnings. The improvement came amid a decline in unemployment as parts of the economy reopened. More recent government data on unemployment claims, however, suggest that the labor market’s recovery may be stalling amid a resurgence in coronavirus cases. Fannie Mae said Thursday that its net income rose to $2.55 billion in the second quarter from $461 million in the previous three months. Net income in the second quarter of 2019 was $3.43 billion. Fannie’s latest results were buoyed by a decline in credit-related expenses, which had ballooned in the first quarter as the company braced for a wave of homeowners requesting a break on their mortgage payments because of the pandemic. A surge in refinancing activity to a 17-year-high due to record-low interest rates also helped the company’s bottom line. “Housing has been one of the only bright spots in the economy,” said Isaac Boltansky, director of policy research at investment bank Compass Point Research & Trading LLC. “It’s clear that the pandemic has hit certain segments of the economy harder. It’s impacted folks who are less likely to be homeowners.”

Analysis: How Congress Is Preventing a Medicare Bankruptcy During COVID-19

As the novel coronavirus continues to spread throughout the country and shows no signs of cessation, that’s especially bad news for seniors, and in more ways than one, The Hill reported. Everyone knows of the disproportionate health risks the nation’s elderly face from this virus, but the threat it poses to Medicare has received far less attention. It shouldn’t come as a surprise that COVID-19 is running the government program dry. It was already in dire straits before the pandemic. A 2020 trustee report found that parts of it will run out of money as early as 2023 and become insolvent by 2026. However, with Medicare Part B now covering all coronavirus testing costs, and the Centers for Medicare & Medicaid Services (CMS) also waiving Medicare participation conditions, the system could come to a breaking point in a matter of years. Over 61 million Americans — 18 percent of the population — depend on Medicare for their health needs. This month, Sens. John Cornyn (R-Texas) and Michael Bennet (D-Colo.) introduced the Increasing Access to Biosimilars Act (IABA). This bipartisan bill, previously introduced in the House by Reps. Richard Hudson (R-N.C.), Angie Craig (D-Minn.) and Brian Fitzpatrick (R-Pa.), will create a pilot program that incentivizes providers to use low-cost biosimilar drugs in the Medicare program whenever possible. These drugs, developed to be similar to already-existing FDA medicines, cost up to 30 percent less than brand-names, and a 2017 RAND study estimated that they could save the U.S. health care system as much as $150 million over a 10-year period.

Analysis: A Hedge Fund Bailout Highlights How Regulators Ignored Big Risks

As the coronavirus began shuttering the global economy in March, critical parts of U.S. financial markets edged toward collapse. The shock was huge and unexpected, but the vulnerabilities were well known, the legacy of risk-taking outside regulatory reach, according to an analysis in the New York Times. To head off a devastating downward spiral, the Federal Reserve came to Wall Street’s rescue for the second time in a dozen years. As investors sold a vast array of holdings and rushed to the comparative safety of cash, the Fed pledged to become a buyer of last resort to restore calm to critical markets. That backstop bailed out many people and investment firms, including a class of hedge funds that had been caught on the wrong side of a trade with ample risks. The story of that trade — how it went wrong and how it was salvaged — offers a cautionary tale about important issues Congress did not address in the 2010 Dodd-Frank financial law and the Trump administration’s hands-off approach to regulation, according to the analysis. A decade after Dodd-Frank, America’s sweeping post-2008 crisis fix, was signed into law, commercial banks like JPMorgan Chase and Bank of America are better regulated and safer, but they may be less willing to help smooth over markets in times of stress. Tougher regulation in the formal banking sector has pushed risk-taking to the shadowy corners of Wall Street — areas that Dodd-Frank left largely untouched. In addition, the powers that policymakers have to deal with persistent vulnerabilities have been undermined by Trump administration officials who entered office seeking to weaken financial rules, according to the analysis. The result is a still-brittle system, one in which financial players rake in profits in good times but the government is forced to save them or leave the economy to suffer when things go awry.

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Commentary: The Role of Chapter 11 Bankruptcy in Addressing the Consequences of COVID19*

Many businesses may require bankruptcy proceedings to assist in recovery from the COVID-19-induced recession, according to a commentary by Prof. Jay Westbrook in the CreditSlips Blog. In his view, the best legal approach to any chapter 11 reforms necessitated by the emerging economic crisis lies in building up from the Small Business Reorganization Act (SBRA) to cover more small and medium enterprises (SMEs), rather than trying to adjust the general provisions of chapter 11, the home of larger bankruptcies like General Motors and American Airlines. The database at the Business Bankruptcy Project shows that in 2018, more than half of the businesses that filed under chapter 11 in the Southern District of New York would have fallen under the temporary SBRA cap of $7.5 million. Most immediately, the recently voted funds for small businesses must be available in bankruptcy reorganization cases, according to Prof. Westbrook, and we must remove any barrier to using them in that way. Bankruptcy cannot help unless it can be used in connection with rescue funding, 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.
 

Weekly Jobless Claims Hit 3.84 Million, Topping 30 Million over the Last 6 Weeks

The Labor Department reported today that first-time filings for unemployment insurance hit 3.84 million last week as the wave of economic pain continues, CNBC.com reported. Jobless claims for the week ended April 25 came in at the lowest level since March 21, but bring the rolling six-week total to 30.3 million as part of the worst employment crisis in U.S. history. Claims hit a record 6.87 million for the week of March 28 and have declined each week since then. Last week’s initially reported figure was revised up by 15,000 to 4.4 million, meaning that the most recent total is a decrease of 603,000. Continuing claims rose to just shy of 18 million, a rise of 2.2 million from the previous week. The four-week moving average, which smooths volatility, jumped to 13.3 million, an increase of 3.7 million from the previous week’s average.



 

Federal Reserve to Offer ‘Main Street Loans’ for Businesses with Up to 15,000 Employees

The Federal Reserve is planning to launch its emergency lending program for small and medium-size businesses soon, and even more businesses will be able to qualify than originally planned, the Washington Post reported. The Fed said today that businesses with up to 15,000 employees and $5 billion in annual revenue can apply, a much higher threshold than the initially announced caps of 10,000 employees and $2.5 billion in revenue. Lobbyists and some lawmakers had urged the Fed to open the loans up to more companies, especially distressed oil and gas firms. Companies should soon be able to go to their banks to obtain one of these loans, but the program is not up and running yet. Fed Chair Jerome H. Powell said yesterday that he expected the “Main Street Lending Program” to be operational “fairly quickly.” “These are not grants. These are loans,” Powell emphasized yesterday. Most small businesses with less than 500 employees have been encouraged to seek a Small Business Administration loan, known as the Paycheck Protection Program, because that can be forgiven if the small business uses most of the money to rehire and pay employees. The Fed’s program is designed to target midsize companies and businesses that need money for more than just payroll expenses. The minimum loan size is $500,000, and companies will have up to four years to pay the money back. Most of the loans are capped at $25 million, but the Fed created an additional option to obtain a loan of up to $200 million. The interest rate on the loans will be about 3.4 percent, as it is set three percentage points above the LIBOR, a global benchmark interest rate. By contrast, the Small Business Administration’s PPP loans were set at a much lower interest rate of 1 percent.

Commentary: Is This a Liquidity Crisis or a Solvency Crisis? It Matters to the Fed*

Whether the economy is facing a liquidity crisis or a solvency crisis is a distinction that will determine how important the Federal Reserve is to returning the economy to health, according to a Wall Street Journal commentary. In a liquidity crisis, otherwise-healthy firms collapse because they can’t access credit. The Fed can resolve such a crisis because it can print and lend unlimited amounts of money. In a solvency crisis, companies can’t survive no matter how much they can borrow; they need more revenue. The Fed can’t solve that. Fed Chairman Jerome Powell underlined the distinction yesterday. The central bank had directed aid to sectors “where we have never been before and … quite aggressively,” he said at a news conference after the central bank’s policy meeting. “Nonetheless, these are lending powers. We can’t lend to insolvent companies. We can’t make grants.” By preventing illiquid companies from going bankrupt, the market seems to believe that the Fed has set the stage for a brisk economic recovery once the coronavirus pandemic eases. Investors may have conferred more power on the Fed than the Fed believes it has. Mr. Powell urged Congress to appropriate more money to aid potentially insolvent firms and the unemployed. “This is the time to use the great fiscal power of the United States to do what we can to support the economy,” he said. A much bigger challenge looms: the many companies that were profitable before the pandemic and should be again when the pandemic has passed, but that may not survive that long. Providing them with cash should pay economic dividends in terms of protecting jobs and incomes, but such a move is complicated by the question of whether the firms are illiquid or insolvent. (Subscription 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.
 

Analysis: The Devil's in the Details for Junk Debt Investors Facing Coronavirus Defaults

Before the coronavirus, investors hungry for returns piled into risky corporate loans and bonds with precious little protection for creditors. Now they’re frantically scouring the terms to see just what firms can get away with to survive the fallout, according to a Reuters analysis. At the same time, firms starved of cash and funds thinking about lending to them are also poring over the fine print to see what room they have to shift assets away from other creditors, pay dividends or borrow more while staving off default. With the coronavirus pandemic threatening to trigger a surge in corporate loan defaults, borrowers and investors in so-called covenant-lite loans and high-yield bonds with weak protections for creditors are taking stock fast. Over the past decade, the leveraged-loan market has trebled to about $1.4 trillion. Whereas only 15 percent of loans in 2010 were deemed covenant-lite, now more than 80 percent lack clauses that might trigger warnings about a company’s finances or stop it from stripping out assets, according to S&P Global Market Intelligence.

Commentary: Borrower Beware: CARES Loans Carry a Steep Cost*

Questions are already arising about whether the federal dollars flooding the U.S. economy during the COVID-19 crisis are reaching the intended recipients, and rightly so, when trillions in taxpayer dollars are at stake. But it should make businesses think twice before they take federal money, according to a Wall Street Journal commentary. Clearly, there should be a financial lifeline for America’s hundreds of thousands of small businesses and 30 million unemployed. When the government orders “nonessential” business to close, it’s only reasonable that it should compensate them. But borrower beware! Businesses with flexibility should seriously consider to what extent accepting the terms of federal loans or other support may be a Faustian bargain. The ultimate cost may dramatically outweigh the temporary gain. Through the congressional oversight commission established under the CARES Act, the new Special Inspector General for Pandemic Recovery, and numerous other freshly funded inspectors general, the groundwork has already been laid for aggressive investigation and review of which businesses received — and how they spent — federal emergency funds. Read more. (Subscription 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.

The abiLIVE panel discussion held on April 6, featuring former House Speaker John A. Boehner, discussed oversight of funds appropriated by the CARES Act and provided a warning to firms about being transparent and acting in good faith in accepting the funds. Access a replay here.

Coronavirus Oversight Panel Staffs Up

The committee of inspectors general investigating the coronavirus pandemic response — which lost its chair earlier this month — named its top staffer and launched a website to help the public track its investigations, CNN.com reported. The Pandemic Response Accountability Committee, which was created by Congress in the CARES Act, selected former inspector general Robert Westbrooks to be executive director of the committee, which will examine the coronavirus outbreak response and the trillions being spent to prop up small businesses and help corporations. The PRAC, composed of 21 members from offices of inspectors general across the federal government, is intended to help coordinate their investigations into various elements of the outbreak response. But the committee has gotten off to a rocky start after naming then-acting Pentagon Inspector General Glenn Fine as chairman of the committee. A week later, Trump replaced Fine as head of the Defense Department inspector general office — which in turn made him ineligible to serve on the coronavirus panel, let alone lead it. In addition to the inspectors general committee, the CARES Act created a new special inspector general for pandemic recovery and a five-member Congressional Oversight Commission, and provided an influx of funding to nonpartisan congressional watchdog the Government Accountability Office. House Speaker Nancy Pelosi has also created her own new select subcommittee in the House to investigate the coronavirus response.



In related news, Speaker Nancy Pelosi (D-Calif.) yesterday filled out the Democratic roster on a special committee overseeing coronavirus relief spending, naming six new members to the newly created panel, including some of President Trump’s harshest congressional critics, The Hill reported. The panel, created by a party-line vote last week, will be led by Rep. Jim Clyburn (D-S.C.), the Democratic whip. In a letter to Democrats Wednesday, Pelosi named six additional members: Reps. Maxine Waters (Calif.), Carolyn Maloney (N.Y.), Nydia Velázquez (N.Y.), Bill Foster (Ill.), Jamie Raskin (Md.) and Andy Kim (N.J.). Democrats are billing the panel as a commonsense safeguard to ensure that the historic levels of emergency funding — money designed to prop up businesses, workers, families and medical providers most affected by the coronavirus fallout — aren’t frittered away by fraud and abuse. Republican leaders in Congress and the White House have said that the Clyburn committee is both redundant and politically motivated. They’re accusing Democrats of establishing the panel merely to embarrass Trump in the months leading up to November’s elections.

New ABI Website Supplies Bankruptcy Professionals with Key Resources to Help Navigate the Financial Crisis Resulting from the COVID-19 Pandemic

ABI this week launched its new COVID-19 Resources website for bankruptcy professionals and the public to access 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!

Upcoming abiLIVE Webinars to Examine Litigation Finance, Nuts and Bolts of Subchapter V for Small Businesses and Chapter 12 Update

ABI will host a number of abiLIVE webinars over the next two weeks looking at key issues for practitioners amid the economic downturn due to the COVID-19 pandemic. Expert panels include:

• The "Litigation Finance: Lessons from the Last Financial Crisis for the COVID-19 Downturn" webinar on May 6 will feature 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 register for free.

• Sponsored by ABI's Consumer Bankruptcy Committee, the "Understanding the Nuts and Bolts of ‘New’ Subchapter V Small Business Chapter 11" webinar on May 7 will feature 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, MI). Click here to register for free.

• The "Update Your Chapter 12 Skills" webinar on May 20 will be hosted by ABI's Legislation Committee and feature 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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4.4 Million Sought Unemployment Benefits Last Week

More than 4.4 million Americans filed for unemployment benefits last week, according to the Labor Department, a signal the tidal wave of job losses continues to grow during the coronavirus pandemic, the Washington Post reported. It’s the fifth straight week that job losses were measured in the millions. From March 15 to April 18, 26.5 million people have probably been laid off or furloughed. The number of jobs lost in that brief span effectively erased all jobs created after the 2008 financial crisis. Jobless figures on this scale haven’t been seen since the Great Depression. The new weekly total comes on top of 22 million Americans who had sought benefits in previous weeks, a volume that has overwhelmed state systems for processing unemployment claims. Economists estimate the national unemployment rate sits between 15 and 20 percent, much higher than it was during the Great Recession in 2008 and 2009. The unemployment rate at the peak of the Great Depression was about 25 percent.

In related news, as millions file claims, many are poised to receive more money than they would have typically earned in their jobs, thanks to the additional $600 a week set aside in the federal stimulus package for the unemployed, the New York Times reported. That calculation is based on an analysis of the so-called replacement rate, which is the share of a worker’s wages that is replaced by unemployment benefits. Replacement rates for each state are determined by dividing the average unemployment payment by the average 40-hour-a-week salary of those who receive unemployment benefits. Ernie Tedeschi, a former Treasury Department official and an economist at Evercore ISI Research, combined the new stimulus relief with each state’s average unemployment payment at the end of 2019 to estimate how much their replacement rates would increase. The Massachusetts replacement rate will increase the smallest amount, he found, though it still doubles. Mississippi will have an 88 percentage point jump, meaning workers there earning an average wage will make roughly $130 more in benefits. These estimates, which reflect what tens of thousands of people around the country may now receive, come with caveats. As large portions of the economy remain closed because of the outbreak, rendering more than 26 million people without jobs in a matter of weeks, no one knows for sure how wages and benefits for those receiving unemployment might change as more people enter the ranks. A provision of the stimulus package, for example, allows part-time and self-employed workers who would normally not qualify for unemployment to receive benefits. That will alter the makeup of the typical pool of people filing claims, not to mention the average benefit paid out.

Commentary: Congress Will Need More than the CARES Act to Help Consumers Weather the COVID-19 Financial Crisis

The financial support for Americans within the CARES Act will unfortunately prove to be shockingly minimal, according to a recent essay by Profs. Pamela Foohey, Dalié Jiménez and Christopher K. Odinet. The direct payments represent a fraction of the average American households’ monthly budget. It also quickly became apparent that the payments were unlikely to reach most people within any sort of useful time frame, and that once they did, they could be garnished immediately by debt collectors and even banks themselves. The unemployment benefits, while providing people with more money over several months, required that people be laid off and similarly were unlikely to reach people quickly enough to be effective. People’s wages decreased at the exact time they were spending more money to stock up on supplies. The CARES Act promised to send people small checks and augment unemployment benefits. Americans very soon began to discover that these promises would do little to help them survive the coming months of financial and social upheaval. It has also become quickly apparent to lawmakers that Congress will need to pass at least one additional stimulus package. And with projections that the pandemic could last for 12 to 18 months, it seems that Congress may have several more opportunities to craft legislation that actually will help American families survive the pandemic. This legislation must provide people with true funding to stay current with their minimum necessary expenses as these expenses are incurred. If done right, helping individuals will cost the government more than $2 trillion next time, and the time after that, and possibly the time after that. And, if done right, it will be worth every penny, according to the essay.



 

Getting a Mortgage-Payment Break Isn’t the Boon Many Expected

A government effort to give Americans a break on their mortgage payments during the coronavirus pandemic hasn’t provided the relief many homeowners were hoping for, the Wall Street Journal reported. The stimulus package that Congress passed in March allows homeowners with federally backed loans to suspend monthly payments for up to a year without penalty if they face financial hardship. But the law doesn’t specify what happens after the so-called forbearance period ends. Many borrowers say they are being told they will have to make lump-sum “balloon” payments. The situation is causing extra anxiety for U.S. households dealing with job losses and the struggles of life under lockdown. If mortgage servicers follow through with demands for lump-sum payments, borrowers could be pushed into default, damaging their creditworthiness and compounding the financial pain inflicted by the downturn. The coronavirus relief package passed by Congress created no mechanism to test whether homeowners face financial hardship and left servicers on the hook for payments skipped by borrowers during the forbearance period.


 

U.S. Treasury Says It Will Be Hard for Public Companies to Qualify for Coronavirus Relief Loans

A highly valued public company will have a hard time getting a coronavirus relief loan, the U.S. Treasury said today, just as Congress was poised to approve a new round of funding for the loans known as the Paycheck Protection Program, Reuters reported. “It is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith,” the Treasury said in an updated list of Frequently Asked Questions on the program. Public outcry has erupted over major chain restaurants being able to take out the forgivable loans in the first round of lending this month. Treasury Secretary Steven Mnuchin warned yesterday that companies that received the rescue money intended for small businesses could be investigated. He told Fox Business Network it was “questionable” whether larger firms had qualified for loans based on a self-certification step in the application process. The FAQ made it clear that the Treasury is looking hard at the step in which a small business “must certify in good faith that their PPP loan request is necessary.” “Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that ‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant,’” it said. The U.S. Senate has approved another $310 billion in funding for the loans, with the House of Representatives set to pass it later today.

Global Economy Hit by Record Collapse of Business Activity

Business activity in the U.S., Europe and Japan collapsed in April as governments tightened restrictions on movement and social interaction aimed at limiting the spread of the coronavirus, according to surveys of purchasing managers, the Wall Street Journal reported. The surveys, released today, suggest that governments have effectively closed parts of the economy where face-to-face interaction is unavoidable—such as restaurants and barbers—and activity has tumbled in parts of the economy less directly affected. The drop in services-sector activity is unprecedented in the history of the surveys, even in the wake of the global financial crisis. Manufacturing activity is also contracting, though not quite as severely. According to data firm IHS Markit, the composite Purchasing Managers Index for the U.S. — a measure of activity in the private sector — fell to 27.4 in April from 40.9 in March. A reading below 50.0 indicates that activity has fallen, and the lower the figure, the larger the fall. The April reading was the lowest in data dating back to October 2009.

The Death of the Department Store: ‘Very Few Are Likely to Survive’

American department stores, once all-powerful shopping meccas that anchored malls and Main Streets across the country, have been dealt blow after blow in the past decade. J.C. Penney and Sears were upended by hedge funds. Macy’s has been closing stores and cutting corporate staff. Barneys New York filed for bankruptcy last year. But nothing compares to the shock the weakened industry has taken from the coronavirus pandemic. Sales of clothing and accessories fell by more than half in March, a trend that is expected to only get worse in April. The entire executive team at Lord & Taylor was let go this month. Nordstrom has canceled orders and put off paying its vendors. The Neiman Marcus Group, the most glittering of the American department store chains, is expected to declare bankruptcy in the coming days, the first major retailer to be felled during the current crisis. “The department stores, which have been failing slowly for a very long time, really don’t get over this,” said Mark A. Cohen, the director of retail studies at Columbia University’s Business School. At a time when retailers should be putting in orders for the all-important holiday shopping season, stores are furloughing tens of thousands of corporate and store employees, hoarding cash and desperately planning how to survive this crisis. The specter of mass default is being discussed not just behind closed doors but in analysts’ future models. Whether or not that happens, no one doubts that the upheaval caused by the pandemic will permanently alter both the retail landscape and the relationships of brands with the stores that sell them.

Hard-Hit Restaurants, Gyms and Other Businesses Are Battling Insurers over COVID-19 Shutdown

A multibillion-dollar standoff between the nation’s leading insurers and the restaurants, hotels, gyms and theaters that purchase their policies has spilled into some of the most powerful corridors of Congress, as both sides clash over who should foot the sky-high costs of the coronavirus outbreak, the Washington Post reported. The battle hinges on whether insurance providers should have to pay claims to companies that have shuttered unexpectedly as a result of the deadly pandemic. The dispute has attracted the attention of President Trump, triggered lawsuits in courtrooms nationwide and touched off a massive lobbying blitz on Capitol Hill, where some insurers say the federal government instead should be the one providing financial help to those that need it most. The industry’s powerful lobbyists, led by the American Property Casualty Insurance Association (APCIA), say “business interruption” policies never were intended to cover contagions. Even if they had been, the estimated claims just from small businesses during the coronavirus pandemic could total more than $430 billion a month, threatening to create a “solvency event” for the industry, said David A. Sampson, the group’s chief executive. But business executives who have paid their premiums for years say they have been misled — and now face dire financial straits without the aid they believe they were promised. Some have sought federal aid in response: Prominent restaurateurs including Wolfgang Puck, for example, have raised the issue directly with Trump in recent days. The problem has taken on even greater urgency because of growing confusion about who qualifies for federal coronavirus aid, given changing government guidelines — and fast-dwindling funds.

Businesses Strive to Reopen from Coronavirus Shutdown

As America’s attention turns to reopening its economy, many businesses are deploying a range of tactics to attempt to shield their workforces from the coronavirus. For the most part, they are making it up as they go, the Wall Street Journal reported. With no single standard or clear-cut road map, safety procedures and implementation vary widely, particularly on how to handle confirmed COVID-19 cases in the workplace. Pepsi-Cola bottling plants in New York are giving factory workers surgical masks and checking their temperatures at the door. A rival Coca-Cola bottler has given employees thermometers to monitor themselves and red bandannas as face covers at work. Testing employees for the virus before they come to work has also emerged as a potential solution for businesses looking to better track the outbreak. But executives say that there are still many hurdles to widespread deployment, including whether enough tests can be secured and workers will agree to take them. Businesses that never closed their facilities because they were deemed essential are on the forefront of these ad hoc efforts — with vastly mixed results and constant changes. Others, such as many major car makers, plan to reopen factories in coming weeks. The patchwork approach to safety is creating tensions with unions and debate over whether some companies are doing enough to protect workers. Some employees in recent weeks have walked off the job, saying their workplaces were putting them at risk. (Subscription required.)

ABI's GlobalInsolvency Webpage Features Global Responses to Limit the Economic Impact of COVID-19 Pandemic

Learn about the ongoing measures being taken around the world to limit the economic impact of the COVID-19 pandemic. GlobalInsolvency members have compiled insights into fiscal, monetary & macro financial, health policy and global cooperation/international assistance measures undertaken to date. Click here to view the COVID-19 Global Response page.

Upcoming abiLIVE Webinars Examine Trading in the Secondary Markets, Litigation Finance and the Nuts and Bolts of Subchapter V for Small Businesses

ABI will host a number of abiLIVE webinars over the next two weeks looking at key issues for practitioners amid the economic downturn due to the COVID-19 pandemic. Expert panels include:

• Hosted by the ABI Claims Trading Committee, "Trading in the Secondary Credit Markets: When Am I Bound?" on April 29 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 register for free.

• The "Litigation Finance: Lessons from the Last Financial Crisis for the COVID-19 Downturn" webinar on May 6 will feature 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 register for free.

• Sponsored by ABI's Consumer Bankruptcy Committee, the "Understanding the Nuts and Bolts of ‘New’ Subchapter V Small Business Chapter 11" webinar on May 7 will feature 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, MI). Click here to register for free.

• The "Update Your Chapter 12 Skills" webinar on May 20 will be hosted by ABI's Legislation Committee and feature 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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