Natalia Garcia Baerga – Throughout history, monitoring bankruptcies has been an effective way of understanding the current economic status and business cycle. However, it seems this relationship between bankruptcies, macro-economic conditions, and the business cycle has changed during the COVID-19 crisis. Specifically, contrary to the media’s portrayal of small businesses struggling throughout the pandemic bankruptcy filings by small businesses and consumers dropped dramatically, while Chapter 11 filings by corporations increased dramatically. Economists are now suggesting that large corporations, rather than small businesses, will require bankruptcy restructuring as a result of the pandemic’s economic impacts.
The Massachusetts Institute of Technology’s School of Management noted that the U.S. Gross Domestic Product declined by 9.5% at the beginning of 2020. Economists and researchers have set out to determine how this will affect the market in the future. One study demonstrates that business Chapter 11 fillings have increased by 35 percent, while consumer Chapter 7 filings have remained consistent, and declined at some points. An important aspect to keep in mind when looking at the differences between small businesses, consumers, and corporations is that corporations can use filing for bankruptcy as a protective measure, while filing for bankruptcy tends to hurt small businesses and smaller consumers. Keeping this in mind, one of the main issues faced by these big corporations is that they already had sizable debts at the start of 2020. U.S. corporations owed $10.5 trillion to creditors in early 2020 by one estimate, a figure 30 times higher than it was 50 years ago. The previous looming corporate debt coupled with the COVID-19 crisis could lead to an exhaustion of the bankruptcy system’s resources as more corporations file for bankruptcy in an attempt to protect themselves. Regardless of any conflicting research, financial distress seems to be looming in the near future in one way, shape, or form.
Some companies with greater amounts of debt filed for bankruptcy early on in the pandemic. According to S&P Global Market Intelligence, 630 companies declared bankruptcy in 2020. The 7,128 Chapter 11 commercial filings were the most seen since 2012. After a significant spike in the number of commercial Chapter 11 filings in the second and third quarters of 2020, new Chapter 11 filings have declined in 2021. Corporations usually file for bankruptcy under Chapter 11 for restructuring and reorganization purposes. Due to the pandemic, companies have been able to implement policies that allow for the type of restructuring that Chapter 11 is typically utilized for under bankruptcy proceedings. Some of these policies include new. These types of policies have allowed these corporations to avoid filing Chapter 11 bankruptcy. However, experts remain adamant that the current favorable conditions for corporations that have allowed them to avoid filing for bankruptcy will not last. While the recent decline in bankruptcy filings seems to support positive projections for financial markets and the economy, central bankers and other experts remain skeptical that the U.S. economy will continue this positive trend. Specifically, the unpredictability of the coronavirus and its mutations, a recent increase of risky investments, and other operational problems such as potential labor shortages caused by the pandemic pose risks despite strong stock market performance and declining bankruptcy rates.
Several policy proposals to help mitigate the effect the pandemic will continue to have on cash-strapped corporations have been suggested ranging from a complete restructuring of policy making as a whole and restructuring schemes that help companies avoid bankruptcy.
With the unpredictability of COVID comes the unpredictability of the economy, businesses, and the market. The truth of the matter is that it is hard to tell how the pandemic will affect the market and businesses in the long run, but what is clear is that, as has been true in every other sector of the corporate and legal worlds, creativity and flexibility will be needed to help distressed companies navigate bankruptcy both during and after the pandemic.