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US business bankruptcies

This page is about US business bankruptcies – mainly the quarterly totals. The main question is the overall health of balance sheets in the business sector.

This page is no longer maintained

Summary

26 May 2011.

Business bankruptcies rose steeply from 2006 to 2009, and peaked in Q2 of 2009. The rise 2006-2009 was due to a combination of (1) the credit crisis and (2) a rebound after a 2005 change in the law caused temporary fluctuations. The fall in the last few quarters was due to (1) a surge of corporate bond issuance in 2009, and (2) an increasing fraction of liquidations, as DIP financing was cut back.

Graph

26 May 2011. Data through Q1 of 2011.

Click for larger image. Data are from the Administrative Office of the US Courts, via the American Bankruptcy Institute.

Highlights

Clippings below covered through 23 Aug 2010.

2005 change in US bankruptcy law (26 Jun 2010) The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, effective Oct 2005, was mainly intended to make it more difficult for individuals to file for Chapter 7 bankruptcy, under which most debts are forgiven, encouraging rather Chapter 13, under which more is repaid. This was in reaction to a long-term, five-fold increase in bankruptcies from 1980 to 2002.

The Act also made Chapter 11 business reorganizations more difficult and costly. For example, the court can no longer extend leases beyond 7 months without the consent of the lessor, vendors have stronger rights to reclaim goods already delivered or seek priority payment, and utilities may demand deposits in order to continue service.

As a result of the change in law, there was a peak in bankruptcy filings in 2005 and a drop in 2006. This exaggerated the growth in bankruptcies in the credit crisis of 2007 and following.


DIP financing drought forced more liquidations (26 Jun 2010) DIP financing was provided in a decreasing fraction of all corporate defaults, from about 57% in 2005 to about 22% in 2009. Thus the fraction of liquidations probably increased and the fraction of bankruptcies decreased.


High junk bond issuance in 2009 prevented many defaults (26 Jun 2010) Junk bond issuance more than doubled in Jan-Aug 2009 compared to the same period in 2008. S&P attributed declining default rates partly to this.


Two reminders on what the numbers mean (26 Jun 2010)

  • Not all failed businesses file for bankruptcy; the number of business failures may be something like 2-3x the number of bankruptcies.
  • AACER reports slightly higher numbers than the government, based on their readings of the court petitions.


Covered and not covered

Quarterly data provide an adequate view of the trend and are covered here. Monthly data are quite noisy and are not usually covered.

Sources

See also

Business closures about 2-3x business bankruptcies

20 Jul 2008. Mish's Global Economic Trend analysis.

http://globaleconomicanalysis.blogspot.com/2008/07/bls-bs-exposed-commercial-bankruptcies.html

“BLS BS Exposed: Commercial Bankruptcies Soar”

“roughly two to three businesses fold for every one that files for bankruptcy, said Jack Williams, resident scholar at the American Bankruptcy Institute. … Commercial bankruptcy filings reported by Automated Access to Court Electronic Records are typically higher than official government figures due to a more thorough reading of the petitions.”

US DIP financing static while bankruptcies increase

26 Jan 2009. FTUSA p15.

“Liquidation risks grow in US. Nicole Bullock, Adelene Lee, Anousha Sakoui”

“Standard & Poor's … said on Friday there had been no substantial increase in DIP volumes in 2008, in spite of a jump in the number of bankruptcies, highlighting the reluctance of banks and investors to finance companies in bankruptcy. … Lenders, even those with priority claims, face big losses, if a company cannot reorganise and liquidates. Senior lenders to retail companies would recover less than half of what they would if the company reorganised under Chapter 11, according to S&P. Debtors also face the highest rates yet for DIP financing. The risk premium a debtor has to pay on the loan has more than doubled since 2001-2002, the height of the last downturn, according to Dealogic. In 2001 the spread over Libor was 429bp compared with 900bp now.”

Defaults with DIP financing fell from 57% in 2005 to 22% in 2009

9 Jul 2009. FTUSA p21.

(No link; chart only in paper version of article.)

“Lear funding affords hope to others in bankruptcy. Nicole Bullock”

[Chart shows fraction of defaults with DIP financing falling from about 57% in 2005 to about 22% in 2009.]

High issuance in 2009 allowed many companies to avoid default

3 Sep 2009. Reuters.com

http://www.reuters.com/article/marketsNews/idUSN039597920090903

“U.S. junk bond default rate rises to 10.2 pct -S&P. By Dena Aubin; Editing by James Dalgleish”

”“The bright spot for credit markets amid the current economic downturn is an increase in new issuance,” S&P said. Junk-rated bond sales have grown to $73.6 billion through August from $35.8 billion in the same period last year. Investment-grade issuance has risen to $603 billion from $537 billion, according to S&P.

A reopening of the bond market following last year's credit freeze is allowing companies to refinance debt, keeping defaults lower than they otherwise would be.”

Credit issues forced more liquidations in 2009

14 Jun 2010. Turnaround Management Association.

http://www.turnaround.org/Publications/Articles.aspx?objectId=13015

“Credit Crisis Puts Focus on Out-of-Court Restructurings. by Robert H. Barnett, Brian J. Grant”

“The credit crunch and economic downturn over the last two years have created a need for restructuring a large number of companies. Yet at the same time, the downturn created conditions that have made it very difficult for debtors to use the U.S. Bankruptcy Code as a tool to restructure. Although the number of bankruptcy filings hit a nearly 20-year high in 2009, second only to 2001 in terms of large corporate filings, the percentage of successful reorganizations is down significantly in this cycle.

Many companies that entered bankruptcy, including such high-profile debtors as Circuit City and Linens ‘N Things, failed to reorganize and ended up in liquidation. During that that time, a large number of companies simply liquidated out-of-court.

Unlike any other time in recent history, corporate restructurings are challenged by the systemic lack of financing, great uncertainty over asset values, and complex and often convoluted capital structures. As a result, Chapter 11 bankruptcy has become less effective in today’s environment, and the conditions of the credit crisis have created new and unique challenges to out-of-court restructurings. …

According to industry sources, the number of active DIP lenders dropped from more than 30 at the beginning of 2008 to only five or six by the end of the year. …

Unfortunately, restructuring through a Chapter 11 bankruptcy is perhaps as difficult as it has ever been. DIP financing remains scarce, and many companies are so overleveraged that securing the DIP financing they would need to continue operating is very difficult.”

DIP financing still scarce in Aug 2010

23 Aug 2010. Cleveland Business

http://www.crainscleveland.com/article/20100823/SUB1/308239994

“Financing spigot re-opens, aiding acquisitions, money flow. By DAN SHINGLER”

““There's no access to capital still” in the bankruptcy world, said Jean Robertson, a leading bankruptcy attorney at Calfee Halter & Griswold in Cleveland.

The debtor-in-possession financing that Chapter 11 companies normally use to stay afloat while they reorganize is “nonexistent,” Ms. Robertson said, forcing many companies that otherwise might reorganize to liquidate instead. ”