Supply Chain Snags Poised to Spur New Wave of Corporate Distress​​​

Rising helium costs, missing auto parts, and shipping delays are spurring a new wave of financial trouble for companies already saddled with debt amid broader concern that the U.S. economy is on the brink of a downturn, Bloomberg News reported. Companies from Party City Holdco Inc. to Diebold Nixdorf Inc. have reported earnings in recent weeks that were crushed by supply chain pressures and red-hot inflation. One company, Armstrong Flooring Inc., has already been pushed into bankruptcy after higher costs eroded its cash. And auto collision repair company Service King is negotiating with creditors over ways to ease its debt load as it struggles to secure auto parts and get mechanics back to work. t’s an acceleration of a trend that emerged at the end of last year, as companies hit with rising prices struggle to pass on these costs to customers. Specialists in troubled companies say that the pain isn’t going to let up any time soon, as supply chain issues show no signs of improving while consumer demand is set to slow due to higher interest rates. “Those three factors are for sure a recipe for distress, and we’re starting to see that,” Angelo Rufino, managing partner and chief investment officer of Brookfield Special Investments, said in an interview. “We are rapidly sharpening our pencils.” The bleak outlook drove the amount of corporate debt trading at distressed levels to $146.1 billion for the week ended May 20, the highest level since December 2020. US bankruptcy filings also hit a one-year high at the start of the month amid a broader pickup in filings with at least $50 million in liabilities. The Federal Reserve’s plans to tamp down on inflation with aggressive rate hikes only adds to the woes of distressed companies. Higher interest rates will make it difficult for them to make debt payments, according to Sanjeev Khemlani, leader of the senior lender advisory practice at FTI Consulting Inc. Steeper borrowing costs may also spur a new set of so-called “zombies,” companies that have run of out cash but don’t have any triggers on their debt that could allow lenders to push the firm to file for bankruptcy, Khemlani said.

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Commentary: Bankruptcy Developments in Subchapter V Eligibility Requirements​​​

A debtor electing to proceed under subchapter V of the Bankruptcy Code as a small business debtor must meet certain eligibility requirements, but a decision on April 12, 2022, by Judge Ernest Robles of the U.S. Bankruptcy Court for the Central District of California highlights what appears to be a substantial drafting error in the provisions of subchapter V that may cause certain small business debtors to be ineligible to proceed under subchapter V than may have been intended, according to a commentary by Schuyler G. Carroll, Bethany D. Simmons and Noah Weingarten of Loeb & Loeb in Westlaw Today. In In re Phenomenon Marketing & Entertainment, No. 2:22-bk-10132-ER, Judge Robles ruled that a debtor was not eligible to proceed under subchapter V because the debtor was an "affiliate" of an "issuer" as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. § 78c) (the "Exchange Act"). Under Bankruptcy Code § 1182(1)(B)(iii), affiliates of issuers may not be debtors under subchapter V. Most significantly, Judge Robles found that the term "issuer" is not limited to publicly traded companies and includes privately held companies. Thus, a debtor with a non-public affiliate may be excluded from proceeding under subchapter V.

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U.S. Economy Shrank by 1.5% in Q1, but Consumers Kept Spending​​​

The U.S. economy shrank in the first three months of the year, even though consumers and businesses kept spending at a solid pace, the government reported today in a slight downgrade of its previous estimate for the January-March quarter, the Associated Press reported. Last quarter’s drop in U.S. gross domestic product — the broadest gauge of economic output — does not likely signal the start of a recession. The contraction was caused, in part, by a wider trade gap: The nation spent more on imports than other countries did on U.S. exports. The trade gap slashed first-quarter GDP by 3.2 percentage points. In addition, a slower restocking of goods in stores and warehouses, which had built up their inventories in the previous quarter for the 2021 holiday shopping season, knocked nearly 1.1 percentage points off the January-March GDP. Analysts say that the economy has likely resumed growing in the current April-June quarter. The Commerce Department estimated that the economy contracted at a 1.5% annual pace from January through March, a slight downward revision from its first estimate of 1.4%, which it issued last month. It was the first drop in GDP since the second quarter of 2020 — in the depths of the COVID-19 recession — and followed a robust 6.9% expansion in the final three months of 2021.

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Weekly U.S. Unemployment Claims Decline to 210,000​​​

New U.S. jobless claims fell by 8,000 last week to 210,000, signaling that layoffs remain extremely low and the economy is still expanding despite more headwinds, MarketWatch.com reported. Applications for unemployment benefits had risen to a four-month high of 218,000 in the prior week. Applications for unemployment benefits fell to a 54-year low of 166,000 in March and have hovered near 200,000 since the beginning of the year, government figures show. Raw, or unadjusted, jobless claims fell sharply in California, Illinois and Kentucky. California and Kentucky were largely responsible for the increase in new unemployment filings two weeks ago. Missouri was the only state to show an increase of 1,000 or more claims. New claims declined in 27 states and the District of Columbia. Meanwhile, the number of people already collecting unemployment benefits rose by 35,000 to 1.35 million in the week ended May 14. It was the first increase in almost two months, but these so-called continuing claims are still at the lowest level since 1969.

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Lawmakers Draft Bill on Puerto Rico's Territorial Status​​​

A bipartisan group of lawmakers announced last week that they have agreed on a discussion draft for a bill that would allow Puerto Rico's residents to vote on the island's territorial status, CBSNews.com reported. The draft, which is set to be called the Puerto Rico Status Act, was announced by Majority Leader Steny Hoyer and its main sponsors, Rep. Nydia Velázquez and Puerto Rico's non-voting representative in Congress, Resident Commissioner Jenniffer Gonzalez-Colon. If passed in the House and Senate, the Puerto Rico Status Act would create and fund a process by which residents of the island would take a binding vote to determine the island's status in relation to the U.S. The ballot would not include the island's current territorial status, according to the draft. Voters would instead choose from among three options: statehood, sovereignty in free association with the U.S., or independence. As the bill stands, Puerto Ricans would maintain their U.S. citizenship under all options for at least one generation. If Puerto Rico chooses statehood, the U.S. will begin the process of admitting it as the nation's 51st state, the draft says. If the island chooses free association, it will be independent but share some agreed-upon functions with the U.S. government. If it chooses independence, it will control all aspects of its government. Read more.

Fed’s Lael Brainard Says Digital Dollar Could Coexist with Stablecoins​​​

A U.S. central bank digital currency could one day coexist with and even complement so-called stablecoins, Federal Reserve Vice Chairwoman Lael Brainard told House lawmakers today, the Wall Street Journal reported. “In some future circumstances, CBDC [central bank digital currency] could coexist with and be complementary to stablecoins and commercial bank money by providing a safe central bank liability in the digital financial ecosystem, much like cash currently coexists with commercial bank money,” Ms. Brainard said in prepared testimony released by the Fed. Today’s testimony comes as the Fed debates a potential new form of money to keep pace with private-sector payment innovations, including stablecoins, a type of cryptocurrency intended to be pegged to the dollar or another national currency. Brainard testified today before a House Financial Services Committee hearing on the benefits and risks of a central bank digital currency. Unlike private cryptocurrencies such as bitcoin, a Fed-issued central bank digital currency would be issued and backed by the U.S. central bank, a government entity, as are U.S. paper dollar bills and coins. Read more. (Subscription required.)

State of the Economy and Opportunities for Distressed Investors, Impacts of the Global Pandemic on Valuation and More to Be Discussed at ABI's New York City Bankruptcy Conference on June 10​​​

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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