Detroit's bankruptcy court has seen nary a corporate filing in the past three months as the economy tanked, but that doesn't mean struggling companies won't end up insolvent.
Only one commercial bankruptcy has been filed in the U.S. Bankruptcy Court of the Eastern District of Michigan since Gov. Gretchen Whitmer ordered businesses closed across the state to combat the spread of COVID-19.
On March 24, the same day Whitmer's "Stay Home, Stay Safe" order went into effect, Bedside Angels Home Care LLC in Ypsilanti filed for Chapter 11 reorganization. The in-home care business that started in 2015 to care for the owner's grandmother fell behind in payments to a non-credit check business funder before the pandemic hit the state. No corporate bankruptcies have been filed in the region since the Coronavirus Aid, Relief, and Economic Security Act was passed on March 27. The courts were temporarily closed to in-person proceedings but digital filings remained ongoing throughout the closures.
Comparatively, there were eight bankruptcy filings between March 24-June 18 in 2019, when Michigan's unemployment rate was as low as 3.7 percent in a strong economy, compared to an unemployment rate of 23.2 percent in May 2020 and the lowest consumer sentiment levels since late 2012.
Experts believe many businesses are currently surviving on government loans, relaxed bank protocols, rent deferments and negotiations with customers. But their time is running out and a wave of bankruptcies is expected to splash down in the Eastern District starting in the coming months.
"It's unavoidable and inevitable," said Steve Wybo, senior managing director of Birmingham-based turnaround firm Conway MacKenzie Inc. "Even the sharpest V-curve (economic recovery) possible won't save everyone. Many companies went three months with no revenue and lots of those companies can't go three months and survive in the long term."
For now, businesses are being floated by stimulus in the CARES Act, such as the Payment Protection Program which provides cash-flow assistance loans to small businesses. As of June 12, more than 115,000 businesses in Michigan have received more than $15.7 billion in PPP loans. However, the program's limitations forced some businesses not to take the loans or not use them.
Banks and landlords are also much more forgiving right now, allowing businesses to default on loans temporarily or break traditional contract requirements on receivables, for example. Since the Great Recession, banks had positioned themselves with more liquidity making them able to "absorb higher credit losses" during the coronavirus recession, the U.S. Federal Reserve said in its semi-annual report in May.
"The global banking system is more resilient and better placed to sustain financing to the real economy as a result of regulatory reforms enacted, and measures taken by the banking industry, in the aftermath of the 2008 global financial crisis," the report said.
And because the future is so murky — Who will win the presidential election? Will there be a second wave spike of COVID-19 cases? Will there be more economic shutdowns? — it's nearly impossible for a company to create a reorganization plan for bankruptcy court, said David Dragich, partner at Grosse Pointe-based The Dragich Law Firm PLLC.
"One of the underlining premises for a Chapter 11 bankruptcy is that the business is viable on a go forward basis; it's a reorganization tool to restructure contracts and debt," Dragich said. "Unless there is and until there is a viable business, companies are not going to just file a bankruptcy for the sake of it. They need a plan in place and right now they don't have one."
Instead, companies are working with people like Dragich and Wybo to stretch their payables and survive the coronavirus recession long enough that the economy turns around.
The economy entered a recession in February and economists are becoming less sure of a V-shaped recovery. Goldman Sachs revised up last week its forecasts for gross domestic product and unemployment in 2020, but the economy remains troubled through the end of the year. Goldman predicts the U.S. unemployment rate will be at 9.5 percent by the end of 2020, down from 13.3 percent in May.
Michigan, however, has suffered far worse from the coronavirus recession and related industry shutdowns brought on by Gov. Gretchen Whitmer. For Michigan, the seasonally adjusted unemployment rate dipped in May to 21.2 percent from the revised up rate of 24 percent in April. The employment picture is even more bleak in metro Detroit, which recorded an unemployment rate of 23.2 percent in May, up from 21.5 percent in April, according to data released last week by the Michigan Department of Technology, Management, and Budget.
Those record-high unemployment numbers will undoubtedly return to roost and cause a rash of bankruptcies in the third quarter, said Robert Dye, chief economist for Comerica Inc.
"One of the indicators that drives both personal and corporate bankruptcies is the unemployment rate," Dye said. "We expect the unemployment rate to come down a little bit from the lockdown spikes but not go back to anywhere close to where it's been in recent years. A lingering high unemployment rate tells me there will be a lot of stress on individual households and thus a lot of stress on businesses. The stress is accumulating and is bound to force some businesses into bankruptcy."
Wybo predicts bankruptcies will start showing up in the Eastern District court by mid-August when the federal programs dry up and receivables are no longer being paid throughout industry supply chains.
"Banks will start seeing a lot more companies in default on their covenants (debt agreements), and it won't be from just short-term dips in liquidity," Wybo said. "The problems will have moved to the profit and loss (balance sheet) performance. We're expecting a bloodbath is going to occur."
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