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Corporate bankruptcies slow for now, could pick up later in 2021, experts say

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Corporate bankruptcies slow for now, could pick up later in 2021, experts say

Fewer U.S. companies are entering bankruptcy in 2021 than during the coronavirus-era surge and many prior years. However, experts say the pace could pick up later this year as the economy moves past the pandemic and efforts to address it.

Forty-six companies entered bankruptcy proceedings in April, a drop from March's 61 bankruptcies and less than the 54 recorded in April 2020, according to S&P Global Market Intelligence data. As of April 30, 183 companies have announced bankruptcies so far in 2021. That is fewer than the 207 filings at the same time in 2020 and a slower pace than all but four of the prior 11 years — 2014, 2015, 2017 and 2018.

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Bankruptcy filings exploded in 2020 as lockdown measures to control the coronavirus pandemic hamstrung entire industries and supply chains. Government stimulus has since helped stanch the bleeding and tamp down distress. But recently, all the funding for forgivable business loans through the Paycheck Protection Program has been tapped, which amounted to $782.24 billion as of May 10, according to the U.S. Small Business Administration.

The higher number of bankruptcies caused by the pandemic in 2020 is being balanced out by a lower number of filings in 2021 as government stimulus works its way through the economy, according to David Berliner, a BDO USA LLP partner who leads the company's restructuring and turnaround services practice. The slower pace of bankruptcies will likely remain in place for several months before filings pick back up to normal levels, Berliner said.

"I think we're seeing almost like a seesaw effect," Berliner said in an interview.

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Corporate bankruptcy filings in 2021 are significantly lower than expectations in light of the pandemic, said James Peck, a former U.S. bankruptcy judge and senior of counsel with the law firm Morrison & Foerster, in an interview. Even as consumer-facing industries struggled under lockdown measures, low interest rates, government interventions on behalf of businesses and consumers and flexible creditors are among the factors that could account for the lull in filings, Peck said.

"It was a timeout, if you will, from standard behavior either if you're a debtor or a creditor," Peck said of the pandemic.

As the year progresses, the number of new corporate bankruptcy filings is likely to resemble the slightly quicker pre-pandemic pace but still lag the jump in filings in 2020, experts say.

"I don't think we're going to see a huge spike in bankruptcies," Peck said.

Billion-dollar bankruptcy club stays small

Large bankruptcies — companies claiming $1 billion or more in liabilities — also remain muted so far in 2021, with just three companies fitting the bill.

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With eight months left in the year, chances are good there will be more billion-dollar bankruptcies in 2021, said Connor Murphy, a director at Burford Capital, in an interview. The airline industry, retailers, and oil and gas companies face challenges that could lead to larger filings, Murphy said.

The current downturn has differed from others because it has not been protracted over years like recessions typically are, and the economy has fared better than the dire predictions initially suggested, Murphy said. Many companies that brought in less revenue during the pandemic either cut costs to adjust or managed their expenses in ways that they had not been able to previously as creditors became more flexible, Murphy said.

Still, Murphy said the number of larger bankruptcies in 2021 will likely be less than in 2020, which recorded 44 billion-dollar filings.

"There was a pretty good bloodbath in 2020 on large corporate filings that has tapered off," Murphy said.

Consumer companies recovering

The consumer discretionary sector continues to record a higher bankruptcy count than other sectors in 2021, but the reopening of the economy has brightened its prospects.

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Surveys show an increase in consumers' intentions to spend and comfort getting back to pre-pandemic habits like shopping in stores and traveling, according to the National Retail Federation, which expects retail sales to grow between 6.5% and 8.2% in 2021.

Entertainment ventures like movie theaters and sports venues took a hit during the pandemic, but many companies are making plans to return to fuller operations as pandemic restrictions get lifted, Berliner of BDO said. Restaurants still in business have largely improved their takeout operations and expanded their outdoor dining.

The risk of another wave of coronavirus cases that brings back restrictions could threaten these industries, but it is possible such a risk could be isolated and not widespread in the U.S., Berliner said.

"It may limit profitability for some of these things in the short term," Berliner said of the modified operations of restaurants and venues as they reopen. "But people are creative, and I'm sure they'll figure out some ways to work around that as best as possible."

Editor's note: This Data Dispatch is updated on a monthly basis and the last edition was published April 28.

Bankruptcy figures include public companies or private companies with public debt with a minimum of $2 million in assets or liabilities at the time of filing, in addition to private companies with at least $10 million in assets or liabilities. Market Intelligence may remove companies from this list if it discovers that their total assets and liabilities do not meet the threshold requirement for inclusion.

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