Corporate bankruptcy filings slumped to a nearly four-year low in May as struggling companies are riding out their problems amid the broader economic recovery from the pandemic.
In May, 27 new corporate bankruptcy cases were filed, the lowest monthly total since July 2017. As of May 31, the year-to-date total was 210 cases, a lower figure than all but two of the prior 11 years — 2015 and 2014.
Despite the ongoing drop in new bankruptcies so far in 2021, some experts continue to question whether government support and easy access to capital will keep distressed companies out of court or if another spike will soon come.
"You can't kick the can down the road forever," said Robert Hirsh, a partner in Lowenstein Sandler LLP's bankruptcy and restructuring department.
'You're not running into bankruptcy court'
The slowdown comes on the heels of a jump in bankruptcies in 2020 as distressed companies were further rocked by the COVID-19 pandemic. Experts said government support and hot capital markets have kept at bay what would have otherwise been a continued uptick in filings in 2021. Temporary pandemic restrictions also made it hard to know the true health of struggling companies, and lenders have become more flexible as a result.
The amount of money raised from distressed funds — hedge funds and private equity funds that target struggling companies for potential investment returns — at the onset of the pandemic is also helping keep companies from filing for bankruptcy, said Lucy Kweskin, a partner in Mayer Brown's global restructuring practice.
"If you're able to reduce the interest rate on your debt and you're able to push out maturities and do all these kinds of things, you're not running into bankruptcy court," Kweskin said.
A broader challenge for distressed investors is the odd behaviors of markets in 2021 — valuations have jumped and even companies that might not merit such high market values are able to get financing in a lot of different ways, Kweskin said. The pandemic's clearing of the bankruptcy pipeline and the availability of capital suggest the current pace of filings is unlikely to change, Kweskin said.
More companies are also restructuring outside of the bankruptcy process, according to Vincent Indelicato, a restructuring partner at Proskauer Rose LLP. An unprecedented opportunity to access money along with more flexible lending terms has incentivized companies to try to find solutions other than turning to courts, Indelicato said.
"So long as the capital markets continue to indicate an appetite for yield, I think that companies will continue to try to tap the markets to find solutions, again, without having to file for Chapter 11," Indelicato said in an interview.
'Only going to last so long'
Federal stimulus funds, including the Paycheck Protection Program, and last-minute refinancing have helped companies stay afloat that should otherwise be bankrupt, Lowenstein Sandler's Hirsh said. Additionally, private equity firms that fund many companies do not want those firms to default during the pandemic, according to Hirsh.
"They're giving short-term fixes like refinancing, but that's only going to last so long," Hirsh said.
Markets are also closely watching for signals that the Federal Reserve will start to taper its ongoing support for the economy or raise interest rates from near 0%. The central bank's $120 billion in monthly assets purchases have proven a boon to equities since the program began shortly after the onset of the pandemic. Low interest rates are also further supporting a bullish market.
The S&P 500 has rallied since an initial drop-off in the early days of the pandemic's emergence in the West and is nearly 31% higher than it was Jan. 1, 2020.
Companies within sectors that have weathered the worst effects of the pandemic so far, however, might not be so lucky, according to experts. Many sectors, including hospitality, might not see many bankruptcies until the end of 2022, according to Hirsh. Consumer discretionary companies like restaurants and department stores that were hit hard by pandemic-related closures have continued to face risk.
Even if bankruptcy filings remain slow throughout 2021, they could pick up later this year, according to Joseph Malfitano, founder and managing member of Malfitano Partners. There could be an increased need for courts if capital markets start to tighten up, Malfitano said.
"We are expecting some significant fallout post-Christmas in the retail space in particular," Malfitano said in an email.
Many retailers filed for bankruptcy in 2020, and some companies are still finding their footing after the pandemic accelerated shifts in consumer preferences and technological changes in the industry, said L. Katherine Good, a partner at Potter Anderson Corroon LLP, in an interview. Supply chain issues have hit the auto industry, while healthcare companies have struggled as many canceled elective procedures during the pandemic and government support is winding down.
"They may not be in the strongest position to weather another adverse effect at the moment," Good said.
Editor's note: This Data Dispatch is updated on a monthly basis and the last edition was published May 12.
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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