Zombie Firms Face Slow Death in US as Era of Easy Credit Ends​​​

America’s corporate zombies, companies that aren’t earning enough to cover their interest expenses, are facing a challenge like never before now that the era of easy credit and unconventional monetary policy is over, Bloomberg reported. From meme-stock favorite AMC Entertainment Holdings Inc. to household names such as American Airlines Group Inc. and Carnival Corp., their ranks have swelled in recent years, comprising roughly a fifth of the country’s 3,000 largest publicly traded companies and accounting for about $900 billion of debt. Firms that could once count on virtually unfettered access to the bond and loan markets to stay afloat are being turned away as investors girding for a recession close the spigot to all but the most creditworthy issuers. The fortunate few that can still find willing lenders face significantly higher borrowing costs as the Federal Reserve raises interest rates to tame inflation of more than 8%. With surging input costs poised to eat away at earnings, it’s left a broad swath of corporate America with little margin for error. Of course, there have been any number of moments over the past decade when zombie firms have appeared on the cusp of a reckoning, only for markets to be tossed a last-minute lifeline. But industry watchers note that what makes this time different is the presence of rampant inflation, which will limit the ability of policy makers to ride to the rescue at the 11th hour. That’s not to say that a wave of defaults is imminent. The Fed’s unprecedented efforts to bolster liquidity following the onset of the pandemic allowed zombie companies to raise hundreds of billions of dollars of debt financing that could last months, even years. Junk-rated companies, those ranked below BBB- by S&P Global Ratings and Baa3 by Moody’s Investors Service, have borrowed just $56 billion in the bond market this year, a more than 75% decline from a year ago.

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Supreme Court Faces Historic Case Backlog as Term Comes to an End​​​

The Supreme Court is due to issue 33 opinions, a whopping 53% of its expected total in argued cases, as its 2021-22 term comes to an end in the next month, Bloomberg News reported. Among them is a case to resolve a circuit split and decide whether the increase in fees payable to the U.S. Trustee system in 2018 violated the uniformity aspect of the Bankruptcy Clause of the Constitution because it was not immediately applicable in the two states that have Bankruptcy Administrators rather than U.S. Trustees. See Siegel v. Fitzgerald, 21-441 (Sup. Ct.) (cert. granted Jan. 10, 2022). The government conceded at oral argument on April 18 that the fees were up to seven times higher for several months in the two states with Bankruptcy Administrators, according to Rochelle's Daily Wire. Still, the government contended that the fees were not substantive but were procedural and therefore did not offend the uniformity aspects of the Bankruptcy Clause. If the Court were to decide there was a constitutional violation, the government argued that the proper relief would not be refunds to the debtors in 48 states who paid more, according to the RDW column. Rather, the government contended that the proper relief would require debtors in the two states to reopen their cases and pay the higher fees by requiring disgorgement from creditors who had been paid more because the fees were lower. Read the April 20 RDW column on the oral argument in Siegel v. Fitzgerald.

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SPACs Were All the Rage. Now, Not So Much.​​​

Wall Street’s love affair with SPACs is sputtering. After two active years, during which investors poured $250 billion into SPACs, rising inflation, interest rate increases and the threat of a recession are fomenting doubts, the New York Times reported. Increasingly, investors are withdrawing their money from SPACs, which they’re allowed to do at the time of the merger. With stocks of high-growth companies recently getting clobbered, they have been less willing to bet that SPAC mergers — which often involve risky companies — will be successful. At the same time, regulators are stepping up scrutiny of SPACs. The Securities and Exchange Commission has opened dozens of investigations into SPACs and is proposing tighter rules. Increased regulation would make SPAC deals less profitable for the big investment banks that arrange these transactions, because they would have to commit more resources to comply. They, too, have begun pulling back. On Tuesday, Forbes Media became the latest company to scrap its planned merger with an SPAC. Around 600 SPACs that went public in the past couple of years are still trying to complete deals, according to data from Dealogic. Roughly half of them might not find targets before their two-year window closes. At least seven SPACs have folded since the beginning of the year. Another 73 SPACs that were waiting to go public have shelved their plans. A fund that tracks the performance of 400 SPACs is down 40 percent over the past year.

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Commentary: Relief Through Student Debt Cancellation Will Help Workers Today​​​*

Americans collectively owe $1.6 trillion in federal student loan debt, affecting nearly 43.4 million American workers. The student debt crisis is fueled by a cycle of suppressed wages, demand for higher credentials and rising costs in the pursuit of an education, according to a commentary by Rep. Andy Levin (D-Mich.) in The Hill. Studies indicate that 60 percent of all jobs in the U.S. economy require postsecondary education and training beyond high school. Research from the Bureau of Labor Statistics suggests that a bachelor’s degree is typically required for entry in 169 occupations. Thinking they were investing in their future, millions of U.S. workers have gone back to school or pursued a college degree. In 1960, roughly 7.7 percent of the U.S. population had graduated from college. Now more than 37.5 percent of U.S. workers aged 25 and above have at least a college degree. But as students have graduated, they have entered a job market where wages are outpaced by tens of thousands in student loan debt. Over the past 40 years, wage growth for a typical worker was 23.1 percent, compared to a 169 percent increase in the cost of a college education in the U.S. In this world, investment in higher education far too often is not paying off, and roughly 40 percent of workers with student debt were unable to finish their degree.

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*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Fewer Americans Applied for Unemployment Benefits Last Week​​​

Fewer Americans applied for jobless aid last week, with the number of Americans collecting unemployment at historically low levels, the Associated Press reported. Applications for unemployment benefits fell by 11,000 to 200,000 for the week ending May 28, the Labor Department reported Thursday. First-time applications generally track the number of layoffs. The four-week average for claims, which evens out some of the weekly volatility, dipped by 500 from the previous week to 206,500. The total number of Americans collecting jobless benefits for the week ending May 21 fell from the previous week to 1,309,000, the fewest since Dec. 27, 1969. Weekly applications for unemployment aid have been consistently below the pre-pandemic level of 225,000 for most of 2022, even as the overall economy contracted in the first quarter and concerns over inflation persist.

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ABI's New York City Bankruptcy Conference Next Week to Examine State of the Economy and Opportunities for Distressed Investors, Impacts of the Global Pandemic on Valuation and More!

Don't miss ABI’s popular New York City Bankruptcy Conference, scheduled for June 10 at the New York Hilton Midtown in Manhattan. The day-long conference brings together a faculty of New York-area bankruptcy judges with practitioners from the top national insolvency firms in New York City to discuss timely bankruptcy issues. The conference features an expanded workshop format: Each of the six concurrent breakout sessions will be presented twice with different panelists, offering attendees two points of view on the same topic. Additionally, a judges’ roundtable featuring a panel of bankruptcy judges from the Southern and Eastern Districts of New York will discuss current bankruptcy case developments. Find out more and register today! Click here for more information and to register.

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