Pictured: Andrew Nazar and Jeremy Johnson

It is no surprise that many businesses, large and small, experienced significant financial difficulties due to the pandemic in 2020. But despite the massive and unprecedented aid from federal and state government to try and keep businesses afloat, businesses are seeking bankruptcy protection at a rate not seen since the end of the Great Recession. As seen in the latest Polsinelli-TrBK Distress Indices Report for the fourth quarter of 2020, the last three quarters of 2020 showed Chapter 11 filings occurring at the highest rate since 2011.  

The frequency of Chapter 11 filings shows the impact of COVID-19 on businesses as 2020 came to a close. In early 2021, we are seeing a light at the end of this dark tunnel, with the COVID-19 vaccine becoming more available and several states easing restrictions on businesses. Secured lenders should remain vigilant despite these positive indicators. Although economic prospects may be improving for many businesses, we anticipate Chapter 11 bankruptcy filings will continue at similarly high levels for at least the first half of 2021.

Although COVID-19 has certainly put pressure on businesses and forced a significant number of chapter 11 filings, the situation could have been (and may yet still become) significantly worse. First, significant aid through paycheck protection loans and other programs has kept certain businesses from being forced into bankruptcy and creditors, particularly landlords, have been waiting for those funds. Given the concerns about debtors being eligible for many of these programs, some borrowers may be waiting for these funds before filing bankruptcy. Second, the Centers for Disease Control, states and municipalities have put in place restrictions on creditors from pursuing their remedies. These regulatory barriers have prevented creditors from exercising their remedies and we expect these restrictions will be lifted and filings may increase in response to enforcement actions. Third, Congress is again poised to extend the bankruptcy provisions in the CARES Act, extending the expanded cap on small business act cases and related bankruptcy provisions. This expansion may lead to more small businesses taking advantage of the flexible small business bankruptcy provisions. Fourth, valuations of collateral and businesses have varied wildly to the changes in economic conditions with COVID and government relief and this has been going on for nearly a year. This is impacting covenant compliance and bankruptcy rights of creditors in regard to plan valuation and adequate protection. 

The Polsinelli-TrBK Distress Indices are the backbone of a quarterly research report series that uses Chapter 11 filing data – bankruptcies with more than $1 million in assets – as a proxy for measuring financial distress in the overall U.S. economy and breakdowns of distress specifically in the real estate and health care services sectors. It is the only current measurement that tracks both Main Street and Wall Street statistics.

Other significant updates in the report include:

• The Chapter 11 Distress Research Index was 86.74 for the fourth quarter of 2020. The Chapter 11 Index increased just over five points since the last quarter. Compared with the same period one year ago, the Index has increased more than 36 points and compared with the benchmark period of the fourth quarter of 2010, it is down nearly 14%. The Index has increased six of the last seven quarters, with the highest amount of distress since Q2 2011. We anticipate that this Index will continue to increase, perhaps even eclipsing 2011 levels and businesses reckon with the pandemic fallout.

   

• The Real Estate Distress Research Index was 28.09 for the fourth quarter of 2020. The Real Estate Index has remained steady since the last quarter. Compared with the same period one year ago, the Index increased just one point and compared with the benchmark period of the fourth quarter of 2010, it is down nearly 72%. The Index displayed an upward trend in the last three quarters; 2020 was generally much higher than 2019. Real estate filings have remained curiously low, despite the reports of significant disruption in this sector due to the pandemic’s impact on the demand of future commercial real estate tenants.

   

• The Health Care Services Distress Research Index was 416.67 for the fourth quarter of 2020. The Health Care Index was down more than 51 points since the last quarter. Compared with the same period one year ago, the Index has increased 191 points and compared with the benchmark period of the fourth quarter of 2010, it is up 216%. This Index has experienced 15 quarters of continual distress (more than 100 points in a quarter) and continues to track significantly higher than the other indices. Despite the significant distress in health care over the next several quarters, we expect this index will drop as health care businesses have been one of the largest benefactors or federal and state aid. This influx of cash is expected to continue to prop up this sector.

To access the full report, graphs, and all past analysis, visit www.distressindex.com.

We anticipate that 2021 will bring even more bankruptcy filings by owners seeking business solutions to their financial difficulties. It is important to understand that Chapter 11 is not the death knell for businesses and, especially with the recent changes for small businesses, can provide creative solutions to financial distress.

The views expressed in TSL Express'  articles are solely the views of the author and do not represent the views or position of the Secured Finance Network.