Over the past two years, the number of bankruptcies filed has fluctuated mainly due to the circumstances created by the pandemic. Organizations across all sectors were unprepared for such a crisis and scrambled to mitigate the financial fallout. The hardest hit industries at the start of the pandemic included retail, entertainment, travel, hospitality, restaurants and energy. Although there are still many unknowns in the future, companies are doing their best to recover. However, most government support has ceased or is ending, and rising inflation and tighter monetary policies will threaten some companies’ ability to remain financially strong. This allows for more realistic forecasts for 2022 – and what is likely on the horizon is an increase in bankruptcy filings.
Bankruptcy Review 2020 and 2021
During this chaotic and uncertain time, organizations across all sectors have had to reconfigure their operations to best adapt. People around the world have changed their habits, including how often they leave their homes, how they spend their money, and their career paths. The global economic downturn has begun. This, together with government stimulus measures, has caused bankruptcy activity. Here is a recap of the major bankruptcy trends seen throughout the pandemic:
- In 2020, there was a 40% increase in commercial deposits. Mandatory closures from March 2020 have hurt many businesses as they have experienced a sudden drop in demand for their products and services. Three hard-hit sectors are retail, energy and restaurants. Bankruptcy filings particularly increased during the second and third quarters, as many companies could not survive the effects of the pandemic. *
- Many predicted that commercial bankruptcy filings would remain high in 2021, but that was not the case. Economic conditions began to improve in early 2021 due to a number of events, including the widespread introduction of vaccines, fewer restrictions on businesses and customers, lower unemployment rates, historically low interest rates and greater dispersion of government assistance. The result was a banner year for business bankruptcy filing, according to statistics collected by Epiq, which decreased by 50% compared to the previous year. While some struggling organizations took a wait-and-see approach and hoped government assistance would continue, others avoided bankruptcy by reorganizing their operations to keep their businesses afloat. For example, many retail and restaurant establishments have improved their online presence or created curbside and contactless options.
- Most commercial bankruptcy filings in 2021 involved low- and mid-market companies, as confirmed by small business statistics in Chapter 11, Subchapter V, collected by Epiq. There were very few mega or large Chapter 11 case filed in 2021. With access to a robust capital market and readily available financing, large organizations have been able to modify and extend their loan maturities. One exception was the Chapter 11 filing of Nordic Aviation, a regional aircraft lessor. A filing in December allowed Nordic to restructure $6.3 billion in debt.
Bankruptcy Predictions 2022
There are still many unknowns as the pandemic continues, but overall people are getting back to work and looking at the realities of the economy’s slow recovery. Organizations that lost aid or waited to see how things would turn out now have to make tough financial decisions. For many, restructuring might be the best way to continue successful operations or avoid crippling losses. Here are some 2022 predictions that feed off the pandemic bankruptcy trends seen so far:
- The economy will recover slowly and in waves. Organizations operating in industries with higher articulated risk factors for bankruptcy will see the most filings this year and into the near future, until the effects of the pandemic abate and economic conditions improve. improve. These risk factors include labor shortages, supply chain disruptions, interest rate hikes, price inflation, and lack of virtual offerings. Surges in potential coronavirus variants may also increase the risk of bankruptcy for those operating on models involving physical presence, as many in the entertainment and travel industries hang by a thread. Considering all these factors, the Industries those most vulnerable to increases in bankruptcy are retail, hospitality and travel.
- Healthcare has been a crucial industry during the pandemic as there has been an acute need for hospitals and other medical facilities to stay afloat during emerging conditions. Healthcare bankruptcies were relatively low in 2021, with just 13 filings among companies with more than $10 million in debt. One of the largest filings in 2021 was Golf Coast Health Care, LLC, which operates 28 skilled and assisted nursing facilities in Florida, Georgia and Mississippi. The industry was under financial pressure before the pandemic, however, and hospitals and Health care system revenue has declined sharply due to the COVID 19 pandemic. Hospitals have postponed elective surgeries, and many have postponed screenings, as well as primary care and other specialty visits. At the same time, the cost of acquiring PPE and other equipment has risen sharply. Organizations that have been able to postpone restructuring may need to explore bankruptcy options this year.
- Some analysts believe a student loan bubble is about to burst. Federal student loan payments were recently postponed again until May, and it’s unclear if there will be another extension or if payments will resume at some point this year. If there is no further extension, a fair prediction is that the bubble bursting theory might come true. Inflation, along with other individual debt maturing, will make it harder for many to make those payments the same way they could before the pandemic.
This is the year for organizations to take a hard look at their financial situation and create a viable plan. Bankruptcy can be a useful tool to reorganize debt and strengthen operations to achieve a better path to profitability.
If you liked it, consider reading The Future of Student Loans and Bankruptcy – Is There a Bubble Waiting to Burst?
Note: Statistical information on shared commercial bankruptcies is provided by Analysis of Epiq bankruptcies.