According to data from the American Bankruptcy Institute, the high water market for business bankruptcies during the financial crisis occurred during the second quarter of 2009, when there were 16,014 business bankruptcies. The number of business bankruptcies has declined each quarter since then. During the second quarter of 2011, there were 12,304 business bankruptcies, representing a decline of about 23% from the quarterly high two years prior.
But while the quarterly business bankruptcy filings are down from the credit crisis highs, they still remain at elevated levels. If you compare the 12,304 business bankruptcy filings during the second quarter of 2011 to the quarterly filing levels prior to the fourth quarter of 2008, the 2Q11 filing levels are higher than any quarter since the first quarter of 1998 (when there were 12,410 business bankruptcy filings). So even though the number of bankruptcy filings has declined over the last two years, there are still very significant numbers of businesses filing for bankruptcy.
In addition, there are some concerns that we could be in for a new round of increased bankruptcy filings. In an October 10, 2011 Reuters article entitled “New U.S. Bankruptcy Ripples May Emerge in Tough Economy” (here) the authors suggest that “corporate failures may be about to pick up again, with some big-name companies struggling for survival.” Among the factors the authors cite as possible causes for a new round of bankruptcy filings are “the weak economy, lackluster consumer spending, a shaky junk-bond market and increasingly tight lending practices.”
The authors also suggest that some companies that managed to get through the last couple of years by restructuring may now have to face the music. The article’s authors note that “confidence in the economy and easy access to debt allowed companies to complete restructurings in 2009 and 2010 with business plans and debt loads that were based on an economic pickup that has now faltered.” These circumstances “could create the potential for trouble at companies that have already restructured once.”
An October 26, 2011 article in Corporate Counsel entitled “Bankruptcies Are Down, But the Business Picture Still Isn’t Rosy” (here) sounds many of the same themes. The article’s author notes that while business bankruptcy filings are down, many lenders are burdened with underperforming and nonperforming loans. Eventually, push will come to shove on these loans. The article quotes one leading practitioner as saying that activity is up and that 2012 “will be a busy year” and that 2013 and 2014 will be “extraordinarily busy year for restructurings.” In addition there are “huge maturities” coming due in 2014 and 2015. These circumstances could force many companies to seek protection under the bankruptcy laws.
The Reuters article linked above identifies a number of high profile companies, including American Airlines and Kodak, that could face bankruptcy filings. The article also references struggling companies in “industries as diverse as shipping, tourism, media, energy and real estate.”
Of course whether there actually will be an uptick in business bankruptcy filings remains to be seen. But the concerns expressed above underscore the vulnerabilities that financially insecure companies may still be facing. Because of the high claims frequency associated with bankruptcy, these vulnerabilities also imply heightened liability exposures as well. Unless and until the financial recovery picks up sufficient steam to provide positive economic momentum even for financially weak companies, these companies will continue to face both the vulnerabilities and liability risks.
Perspective on U.S. Securities Laws: In an earlier post (here), I noted the dismissal that had been granted in one of the securities class action lawsuits brought against a U.S.-listed Chinese company, North East Petroleum Holdings, Ltd. An October 27, 2011 China Daily article (here) discusses the ruling in the case. The article also contains some interesting commentary from a U.S-based executive of the company.
The article quotes Choa Jiang, described as senior vice-president of the company’s New York City office, as saying that as a result of “internal control deficiencies” the company’s CEO, CFO and a director were asked to resign. The company, Chao says, experienced “growing pains” as it made the transition from a private, family-owned business in China to a U.S.-listed company. But, Chao adds, the company “has learned its lesson,” adding that the company is “learning that the laws regulations, operations and culture in the U.S. are different from those in China.” Chao says that “what’s important is that you correct your mistakes, learn from them and move on.” Chao also said that company wants “to encourage other Chinese companies not to lose faith but vigorously defend themselves with the very best professionals.”
It seems that a number of Chinese companies will have the opportunity to defend themselves vigorously, as lawsuits against U.S.-based Chinese companies continue to mount. Just in the last several days there have been new securities class actions brought against JinkoSolar Holding Co. (about which refer here) CNInsure (refer here) and China Automotive Systems (refer here), all three U.S. listed Chinese companies. With the addition of these three latest lawsuits, the number of U.S. –listed Chinese companies that have been named in securities class action lawsuits during 2011 now stands at 35. These companies, like North East Petroleum Holdings, also have the opportunity to learn that in the U.S., laws, regulations, operations and culture are different than those in China.
That’s Billion With a “B”: Those readers interested in Bank of America’s massive $8.5 billion mortgage put-back settlement will want to read the October 19, 2011 Forbes article about Kathy Patrick, the plaintiffs’ lawyer who negotiated the settlement on behalf of a large group of institutional investors. The article, entitled “Wall Street’s New Nightmare” (here) makes it clear that, as far as Patrick is concerned, the Bank of America settlement is merely round one. Among other things, Patrick states that the institutional investor plaintiffs in the case “did not come together just to deal with Bank of America. They came together because they wanted a comprehensive industry wide strategy and an industry wide solution. They started with Bank of America because they thought they could achieve a template that they could extend to other institutions. “
In other words, at least according to Patrick, she is just getting started. Of course there is the small matter of defending the $8.5 billion BofA settlement from the all comers assault it is currently under.