Q: With so few bankruptcies in 2021, what is the outlook for filings in 2022?
Business bankruptcy filings have been on quite a roller-coaster ride. When the global economy unexpectedly came to a halt in March 2020 due to the COVID-19 pandemic, it was widely anticipated that the abrupt, sweeping shutdowns throughout the U.S. economy would lead to a surge in bankruptcy filings. That surge briefly materialized in 2020, with Chapter 11 filings reaching their highest levels in more than a decade. Then, beginning in October 2020, business bankruptcy filings in the U.S. plummeted, a trend that continued throughout 2021. According to BankruptcyData.com, there were only 3,587 commercial Chapter 11 filings in 2021, compared with 6,870 in 2020—a reduction of 48 percent year over year—and 5,236 in 2019.
Based on the first full month of data available from Epiq, the lull in commercial bankruptcy filings has continued into 2022. We saw 1,499 business bankruptcy filings across all chapters in January 2022, 27 percent fewer than the 2,049 registered in January 2021. Commercial Chapter 11 filings in January 2022 totaled just 223, a 53 percent drop from 479 in January 2021, and a 28 percent decrease from 310 in December 2021.
Driving forces behind the precipitous drop in business bankruptcy filings from October 2020 through the present are believed to include (i) direct federal stimulus programs to the tune of approximately $5.7 trillion, (ii) expansive monetary accommodation from the Federal Reserve providing easy access to liquidity at historically low interest rates, (iii) access to refinancing even for stressed and distressed companies, and (iv) lender forbearance. However, cheap borrowing does not fix the problems that lead distressed companies into trouble. With the era of federal government stimulus and free money finally coming to an end, financially distressed companies that took advantage of the additional access to capital or forbearance without fixing underlying operational or business issues may be at risk.
Though the number of business filings continued to decrease in January, going into 2022 it is expected that businesses will continue to be faced with less government relief, fewer lender deferments, rising inflation, worker shortages, higher labor and raw material costs, and supply chain challenges. The Labor Department recently reported a rise in the consumer price index of 7.5 percent in January 2022 compared with January 2021, the fastest pace for inflation since February 1982.
Should interest rates significantly increase and inflation and oil prices continue to rise while business and other stimulus programs dry up, some financially distressed companies that have been limping along will be forced to file Chapter 11 or resort to other restructuring devices. Companies that have struggled throughout the pandemic but were kept afloat by stimulus money and generous lenders may face trouble in 2022 once those funds run out, the Federal Reserve tightens its ultra-loose monetary policy by ending asset purchases and raising the federal funds rate target, and credit conditions start to tighten. Sectors such as retail, construction, and health care remain particularly vulnerable. Travel, hospitality, commercial real estate, consumer goods, entertainment, midstream oil and gas, and power and other energy infrastructure also face pressure and uncertainty. It remains to be seen how long inflation will persist and when interest rates will rise (and how far). Rising interest rates typically lead to an escalation in bankruptcy filings. If inflation starts to moderate, the Fed may move more slowly in raising interest rates and the proverbial can of bankruptcies may be kicked down the road yet again.
There is a strong possibility that we will see a significant increase in restructuring activity and Chapter 11 cases at some point in the second half of this year. Stay tuned!
Michael Savetsky, Senior Counsel
Lowenstein Sandler LLP