May 19, 2021
By Michael A. Brandess and Mark S. Melickian, Creditors’ Rights Attorneys at Sugar Felsenthal Grais & Helsinger LLP
In the timeless words of Larry David, business credit is pretty good right now. According to the American Bankruptcy Institute, April 2021 commercial chapter 11 filings were down 49% compared to April 2020. Recent legislation, such as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) pumped trillions of dollars into the U.S. economy, inclusive of low interest (and potentially forgivable) loans under initiatives such as the Paycheck Protection Program (“PPP”) and the Main Street Lending Program. Banks are largely holding off on moving defaulted borrowers to their workout groups for several reasons, including the hope that many borrowers who initially defaulted will recover, and to avoid concerns about bad publicity. At least one regional Midwest bank implemented a policy that any borrower who defaulted on a loan due to Covid-19 would not be moved to that lender’s workout group. When institutional lenders do begin pushing bad debt out the door, there are many nontraditional lenders eager to offer bridge loans to needy borrowers. In short, for the time being (and likely through the remainder of 2021), most trade vendors should avoid insolvency, and accordingly, continue paying their bills on time.
But alas, all is not perfect and credit managers must remain vigilant in policing bad debt.
First, the PPP and other low-interest loans have granted many troubled companies a short respite from creditor inquiries. But the loans and grants will eventually exhaust, and, in many instances, trouble will resurface. A governmental subsidy can only hide so many blemishes. While the parties, the industries, and the prevailing factual issues may differ, banks are generally growing more comfortable taking action to address bad debt. Insolvency professionals believe that business bankruptcies (and other insolvency-related events such as receiverships) will likely increase as early as fall 2021.
Second, there are certain business sectors that insolvency professionals are closely monitoring due to widespread belief that their recovery will continue to lag. Below are a few examples:
- Brick-and-Mortar Retail: All the king’s horses, and all the king’s men… Brick-and-mortar retail businesses enjoyed a short reprieve thanks to government-backed subsidies. In fact, some mall owners, such as Simon Property Group, believe that the Covid-19 vaccine, coupled with pent-up consumer enthusiasm, will lead to a substantial rebound for in-person shopping (Simon even acquired several of their tenants out of bankruptcy, such as Brooks Brothers, Forever 21, Lucky Brand, and JC Penny). But e-commerce has continued to build during the pandemic and is not going anywhere (a clear sign of this being the continued spread of massive Amazon distribution centers sprouting up in communities near you). Insolvency professionals expect for the trickle of brick-and-mortar retail bankruptcies to continue.
- Commercial Real Estate: The work-from-home trend was already taking hold prior to the pandemic. Companies, intent on luring top talent while simultaneously (and somewhat unrelatedly) reducing overhead, were increasingly demonstrating flexibility. Once the pandemic hit, businesses were forced to adopt new technology to survive. In many cases, the transition was less terrible than might have been expected. Technologies such as Zoom were already around but had yet to enjoy widespread adoption. Although returning to the office became far safer with the vaccine’s rollout, people have become accustomed to working remotely. Many businesses are looking to reduce leased space to reflect their needs going forward. Insolvency professionals anticipate widespread distress in the commercial real estate market.
- Travel and Leisure: Vaccine vacations might be a thing, but as with commercial real estate, virtual business interactions are here to stay. The Wall Street Journal predicts that business travel will remain diminished for years. Hotels and airlines cannot survive on infrequent family holidays – business travel is the lifeblood of the travel and leisure industry. Absent continued federal intervention (e.g., more stimulus packages), hotels, airlines, and related businesses are up against some tough odds.
- Healthcare and Senior Living Facilities: The healthcare industry has been in turmoil for several decades. The financial issues at the heart of America’s healthcare crisis are, in many ways, market resistant. For many sectors, things are simply that bad. Regional hospitals will continue to starve and die off regardless of outside economic forces. Likewise, senior living facilities, often structured like pyramid schemes, continue to falter, use bankruptcy to shed debt, and restructure. Insolvency professionals continue to see distress in these arenas.
So, how should credit managers capitalize on a relatively healthy market? Below are a few ideas:
- Educate Your Team: Now is a particularly good time to train new professionals. Fire drills should be few and far between. When credit-related issues arise, over-staffing them with newer employees (or employees in other departments) provides a safer and less anxiety-ridden opportunity to prepare for rougher times.
- Credit Insurance: Credit insurance might be more affordable than in past cycles. If you are well-positioned to get credit insurance covering potentially at-risk clients, it might be a good time to make the investment. The good times will not last forever.
- Renegotiate Terms: Renegotiate terms with clients you think might ultimately be at risk based on historical information and personal interactions. While it may seem antithetical to tighten up credit terms while clients are paying on a timely basis, negotiating pragmatic payment terms will be far easier now than down the road.
Now is a great time for credit professionals to breathe just a little easier. But stay prepared. We insolvency professionals see rougher waters ahead.
Michael Brandess and Mark Melickian are partners with Sugar Felsenthal Grais & Helsinger LLP in Chicago. Mark is the Chair and Michael is the Deputy Chair of the firm’s Restructuring, Insolvency, and Special Situations Practice Group. Both Mark and Michael regularly counsel companies, creditors and creditors’ committees on a wide breadth of insolvency-related matters.