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Summertime US corporate bankruptcy filings warm from 2021 low

The pace of U.S. corporate bankruptcy filings is speeding up over the summer, but it may stay relatively slow this year unless lenders grow impatient with struggling companies or if easy access to credit disappears, experts say.

In July and August, a total of 70 new corporate bankruptcy cases were filed, a slight uptick each month from the 32 filed in June and the 2021 monthly low of 26 in May, according to S&P Global Market Intelligence data. The pace is still slower than the same months a year earlier, and the total number of filings in 2021 as of Aug. 31 was at 305, trailing the same period in each of the prior 11 years except for 2014.

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Struggling companies are reaping the benefits of stimulus, loose monetary policy and low borrowing costs to stay out of bankruptcy courts. While the Federal Reserve is poised to remove some of its support for the economy later this year or early in 2022, businesses are likely to ride out the pandemic on a wave of cheap capital and improving economic conditions, experts say.

The ongoing vaccine rollout and related boost in consumer spending are also helping struggling companies, according to experts.

"The more we're able to get things under control, the more that optimism returns," Josh Friedman, global head of restructuring data at Debtwire, said in an interview.

Lenders could react

The threat of growing lender impatience looms for struggling companies. Covenant defaults, which occur when borrowers violate the terms of a loan without missing a repayment, could stress lenders' patience and lead to an increase in filings, said Samuel Maizel, a partner in Dentons' restructuring, insolvency and bankruptcy group.

"I expect to see an increase in filings because I do think that people will start to invoke covenant defaults they're seeing and force borrowers to fix the balance sheet or restructure their debts," Maizel said in an interview.

Rising interest rates could also push more companies into bankruptcy, experts said. The Fed is expected as soon as late September to announce a plan to taper its $120 billion in monthly bond purchases, which have so far kept bond yields and related longer-term borrowing costs low. The central bank, however, is not expected to raise the benchmark federal funds rate, which influences short-term borrowing costs, until 2023.

"It does seem that as interest rates come up and money stops getting printed, things are going to get uncomfortable," Connor Murphy, a director at Burford Capital, said in an interview.

Bankruptcies through the rest of the year, however, will likely look similar to the past few months, with "no real spikes, kind of bouncing along," Murphy said.

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Continued stress for consumer companies

Consumer companies, including restaurants and department stores, were hit hard by the pandemic, which caused nationwide closures and kept would-be patrons at home. Bankruptcy filings for consumer discretionary companies, which largely comprise businesses that sell goods and services viewed as nonessential like vehicles and apparel, have outpaced other sectors in 2021 so far with 48 filings.

The biggest factor will be how variants affect reopenings, according to Debtwire's Friedman. Nearly 154,000 new cases of COVID-19 were reported to the Centers for Disease Control and Prevention on Aug. 31, a jump from less than 10,000 new daily cases reported in mid-June.

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The retail sector is expected to go through a continuing shift, said Maizel of Dentons, as the pandemic accelerates consumers' preference for online shopping over brick-and-mortar stores.

Stores are also prepping for the holiday selling season, which is typically busier than the rest of the year.

"Retail survives on Christmas sales in America," Maizel said.

Editor's note: This Data Dispatch is updated on a regular basis and the last edition was published July 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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