%1

The Federal Reserve warned of significant risks of business bankruptcies and steep drops in commercial real estate prices in a report published on Friday, Bloomberg News reported. “Business leverage now stands near historical highs,” the central bank said in its semi-annual Monetary Policy Report to Congress. “Insolvency risks at small and medium-sized firms, as well as at some large firms, remain considerable.” In part encouraged by government and Fed programs, businesses have taken on more debt over the past year as they’ve struggled to deal with the economic and financial fall-out from COVID-19, including in some cases forced shutdowns. The Fed report, which provides lawmakers with an update on economic and financial developments and monetary policy, was published on the central bank’s website ahead of Chair Jerome Powell’s testimony before the Senate Banking Committee on Tuesday and the House Financial Services panel a day later. In the report, the Fed voiced hopes of an end to the pandemic later this year though it cautioned that pitfalls remained. In particular, it said that commercial real estate prices “appear susceptible to sharp declines” from historically high levels. That could particularly prove to be the case if the level of distressed sales picks up or if the pandemic leads to longer-term declines in demand, it said. Commercial real estate might be hit by a double-whammy after the pandemic, some economists say. An increase in people working from home could result in less demand for office space, while stepped-up online purchases could force more shutdowns of brick-and-mortar retailers and additional vacancies at shopping centers.

The Treasury Department announced today that it will make targeted changes to its Paycheck Protection Program pandemic relief loans in an attempt to direct more funding toward the smallest of small businesses, the Washington Post reported. Among other changes to the loan program, businesses with more than 20 employees will be shut out of the PPP program for a two-week period starting on Wednesday, officials said. The Biden administration has not said whether it will seek to extend the program after the current tranche of funding expires March 31. But Monday’s announcement signaled that the Treasury Department will continue to support the program at least in the short term, while instituting relatively minor changes designed to tame its excesses. In a call with reporters Sunday evening, senior officials sought to turn the page on past criticisms that PPP has sent large sums of money to larger businesses at the expense of smaller ones. Aside from shutting out the larger firms, the Treasury Department announced Monday that it will permanently change the loan calculation formula it applies to independent contractors such as Uber drivers and real estate agents, some of whom received minuscule sums of money under the earlier rules. The new rules are designed to increase their payouts. The Treasury Department also plans to change its application procedures to make it easier for noncitizen business owners to receive loans. And it will eliminate rules that shut out borrowers with past felony convictions and people who have defaulted on student loans, changes that were spelled out in the most recent bipartisan relief bill. Read more. 

The problems plaguing those seeking loans from the government’s revived small-business relief program have ranged from simple to shocking, the New York Times reported. Some applications were stalled for weeks by typos. Overzealous fraud filters trapped others. A change of taxpayer identification rules snarled many freelancers and sole proprietors. And then there were the thousands of people turned down because they erroneously registered as having a recent criminal conviction. Six weeks into the second run of the Paycheck Protection Program, $134 billion in emergency aid has been distributed by banks, which make the government-backed loans, to 1.8 million small businesses. But a thicket of errors and technology glitches has slowed the relief effort and vexed borrowers and lenders alike. Some are run-of-the-mill challenges magnified by the immense demand for loans, which has overwhelmed customer service representatives. But many stem from new data checks added by the Small Business Administration to combat fraud and eliminate unqualified applicants. On Monday, the Biden administration unveiled a number of changes to address some problems and ensure that the most vulnerable small businesses get priority. For a two-week period beginning on Wednesday, only businesses with fewer than 20 employees will be able to apply for loans. Under the general rules, businesses with up to 500 employees are eligible for aid. Also, the Small Business Administration will revise the way loans are calculated so that sole proprietors and other self-employed individuals, who in the past were excluded from the program if they were not turning a profit, are able to tap more funds. Read more. 

Democrats begin the final push for President Joe Biden’s $1.9 trillion stimulus bill this week, dropping any pretense of bipartisanship to quickly pass the package before an earlier round of benefits runs out, Bloomberg News reported. The House plans to vote as soon as Friday on Democrats’ stimulus package, setting up a Senate vote as soon as next week. Resolving the final hurdles, especially disagreement among Senate Democrats about a provision phasing in a $15 per hour federal minimum wage, would clear the way for Biden to give his first address to a joint session of Congress in March outlining his next policy goals, including a multi-trillion dollar infrastructure bill. “The Senate is on track to send a robust $1.9 trillion package to the president’s desk before the March 14 expiration of unemployment insurance benefits” from the last round of stimulus, Senate Majority Leader Chuck Schumer said in a Friday letter to colleagues. “We will meet this deadline.” In public, the focus will be on the House this week with a Budget Committee vote Monday and a floor vote on the bill as soon as Friday. The content of the bill is mostly locked in — the Budget Committee isn’t even allowed to make substantive changes — and there’s no sign of a rebellion by the few remaining Democratic deficit hawks imperiling the bill on the floor. The real action will be behind closed doors in the Senate, where Democratic leaders are hammering out the changes needed to get all 50 Senate Democrats and independents on board. Biden initially sought some GOP support for his stimulus proposal, which includes $1,400 checks for individuals making less than $75,000, resources for vaccine distribution, funds for schools to reopen, and $400 per week in supplemental unemployment insurance. But Republicans said that the plan was too expensive, coming after last year’s $2 trillion and $900 billion virus-relief packages enacted in March and late December, respectively. 

The coronavirus is making it nearly impossible for bankrupt small businesses to predict their future income, adding a surprise wrinkle to a recently enacted law that aims to streamline small debtors’ reorganization, Bloomberg Law reported. Subchapter V of chapter 11 created a new process under which a small business currently with less than $7.5 million in debt can restructure in bankruptcy. The $7.5 million threshold was established by the CARES Act, but sunsets back to the original amount of $2,725,625 unless Congress extends the enhanced limit by March 27. Under the subchapter V, debtors can pay off creditors over a three- to five-year period under a payment plan based on “projected disposable income.” That figure should have been a routine determination based on past business performance. Then the pandemic hit. Covid-19-fueled uncertainty has driven debtors to lowball their projections, while court-appointed trustees have fought to boost creditor recovery. That conflict has become the focal point of bankruptcy cases for small businesses seeking to reorganize under Subchapter V. “Projecting future income is always a trick and the pandemic has made that trick trickier,” said Donald L. Swanson, a bankruptcy attorney at Koley Jessen in Omaha, Neb. Before the law went into effect, bankrupt smaller companies usually overstated their expected income to show they could keep up with payments on secured assets in order to get their plans confirmed, Swanson said. “Subchapter V has flipped that on its ear a little bit,” he said. Debtors with more unsecured debt—such as service-based businesses—now have an incentive to understate projected income to keep plan payments low, Swanson said. Without a committee, the subchapter V trustee may be the only one advocating in court for higher creditor payments in the Chapter 11 plan. Creditors have the right to intervene in a subchapter V case, but many are small businesses themselves and often don’t have the time or resources to do so. Lower payments aren’t all bad news for creditors, however. For many, the real recovery “is not what you’re getting from the distribution in the plan,” said Barbra R. Parlin, an attorney at Holland & Knight LLP in New York, whose practice includes bankruptcy, restructuring, and creditors’ rights. “It’s the fact that they have an ongoing customer. That’s what’s important to them.”

For more news, analysis and statistics on subhcapter V and the Small Business Reorganization Act, be sure to visit ABI's SBRA Resources page.

Treasury Secretary Janet Yellen urged on CNBC yesterday that it's crucial to go big on the next round of coronavirus relief legislation, The Hill reported. “We think it’s very important to have a big package [that] addresses the pain this has caused — 15 million Americans behind on their rent, 24 million adults and 12 million children who don’t have enough to eat, small businesses failing,” Yellen said. “I think the price of doing too little is much higher than the price of doing something big. We think that the benefits will far outweigh the costs in the longer run,” she added, repeating a phrase she has frequently used to argue for a larger stimulus. The administration has been working with lawmakers, business groups and others on President Biden's $1.9 trillion COVID-19 aid and stimulus package. Republicans have balked at the price tag, but Democrats are increasingly indicating their willingness to pass legislation with or without GOP support.

Knotel Inc. has struck a deal with unsecured creditors that will give potential bidders more time to submit offers to acquire the office-space startup’s assets out of bankruptcy, WSJ Pro Bankruptcy reported. Knotel agreed to push back to March 12 the deadline for submitting asset bids, lawyers for the company and a committee representing unsecured creditors said yesterday during a hearing in the U.S. Bankruptcy Court in Wilmington, Del. The committee includes food-delivery startup DoorDash Inc., technology company Neustar Inc. and landlords. The agreement resolved challenges the committee raised over the tight sales timeline Knotel is pursuing. Knotel originally floated a Feb. 28 bid deadline, which would be about a month after the company filed for bankruptcy. A subsidiary of real-estate services firm Newmark Group Inc. has made an offer to acquire Knotel’s assets in exchange for forgiving up to $70 million in company debt. The bid from the Newmark Group subsidiary, Digiatech LLC, will set the floor for any additional offers Knotel receives in the next few weeks.

Gym chain YouFit Health Clubs LLC got a new leader and owners as the company wraps up its bankruptcy case, Bloomberg News reported. The fitness chain, which filed for chapter 11 in November, will be run by a group of former lenders that took control through the court reorganization process, according to a statement Thursday. Birch Grove Capital is the majority shareholder. YouFit also appointed Brian Vahaly as its new chief executive officer. Vahaly was formerly chief financial officer of strength-training studio chain Solidcore and earlier worked in private equity and venture capital roles. The fitness industry is seeking to recover from pandemic-induced forced closures and limits on capacity. Chains including Gold’s Gym International Inc., 24 Hour Fitness Worldwide Inc. and the owner of New York Sports Clubs also sought bankruptcy protection last year. Youfit filed for bankruptcy with a tentative deal to sell itself to lenders in exchange for debt forgiveness, court papers show. It won approval of the sale in December after agreeing to notify gym-goers that their memberships would be transferred to the new owners. The company has 80 locations in the U.S., many of them in Florida, according to its website. YouFit was founded in St. Petersburg, Florida in 2008 and remains headquartered in the state.