Troubled companies across industries have been filing for bankruptcy at a faster pace this year than last, a boomlet that follows a period of record inflation and one of the quickest rate-hike cycles in U.S. history, WSJ Pro Bankruptcy reported. Many of the year’s corporate bankruptcy filers have attributed their plight to persistent price pressures driving up the cost of goods, coupled with continued interest-rate hikes that make it more difficult to refinance debt. Fears of economic instability deepened after the collapse of two regional banks and turbulence at First Republic Bank and Credit Suisse Group AG. This year, a total 753 commercial chapter 11 cases had been filed by the end of February, a 76% increase from 429 filings in the same two-month period last year, according to data and services provider Epiq Bankruptcy. The uptick came before the recent bank failures. Silicon Valley Bank and Signature Bank were taken over by regulators over the weekend. SVB Financial Group, parent company of SVB, filed for chapter 11 on Friday to ease a sale of its remaining assets after the core of its business was seized by federal regulators. Major U.S. banks provided First Republic with a $30 billion lifeline to try to quell panic over the bank failures. Before those failures, Federal Reserve Chair Jerome Powell told lawmakers the Fed was prepared to increase the pace of rate hikes to win its war on inflation. But investors this week are betting the Fed will change course and pause further rate increases. But even if rate hikes are paused or slowed, their rapid rise in the past year has made it harder to refinance at cheap levels. And borrowers saddled with a lot of debt are in worse shape. “Zero percent interest hides a multitude of sins,” said John Penn, chair of Perkins Coie LLP’s bankruptcy and restructuring practice. “Once the interest rates start ticking upwards, and liquidity starts drying up, there are some folks that don’t know how to operate in that environment.” While forecasts of future waves of chapter 11 filings have at times proven incorrect, a confluence of macroeconomic factors are contributing to corporate distress, including the rising cost of capital, said Amy Quackenboss, executive director at the American Bankruptcy Institute. “Businesses which in the last 10 years have taken advantage of low interest rates are having trouble refinancing their debt load,” Ms. Quackenboss said. And some wobbly companies are still facing supply-chain problems that drive up the cost of goods, she said. Now, however, they are forced to cope with those problems without the government assistance available during the pandemic, she added.
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SVB Financial Group, the one-time parent company of the failed Silicon Valley Bank, is filing for bankruptcy protection. The company’s chapter 11 petition on Friday is another development in a banking crisis that’s shaken stock markets and applied pointed questions to banks’ financial health. After bankruptcy cases dropped off during the pandemic, they have been making a comeback this year for both businesses and consumers, according to a MarketWatch.com analysis. “You are seeing companies that are so sick, it’s unavoidable,” said Al Togut, partner at Togut, Segal & Segal, a boutique law firm specializing in corporate bankruptcy. Companies that would otherwise be seeking bankruptcy protection are benefiting from liquidity in the financial system, Togut added. “That’s not to say they don’t need restructuring, because they do. And judgment day will come,” Togut added. Pamela Foohey, a professor at the Cardozo School of Law where her specialties include consumer bankruptcy, echoed Togut’s sentiments, saying “judgment day” is also coming for consumers. But that might take time. Consumers often regard bankruptcy as a last resort, and struggle to repay debts for two or three years before turning to bankruptcy court, she said.
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