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As published in Crain’s Detroit Business
By Nick Manes
The Paycheck Protection Program and other forms of government stimulus have been roundly criticized for all manner of reasons, but they’ve been incredibly successful at keeping companies out of bankruptcy.
Despite a pandemic that brought the U.S. and global economies to a standstill in the spring of 2020, which then began to show signs of life in the following months and is now in something of a sputtering mode, corporate bankruptcies have been slow to materialize.
But as stimulus money dries up and economic headwinds continue to cause havoc in supply chains, it’s all but assured that the current conditions won’t last, say corporate turnaround and bankruptcy experts.
“Everybody in the insolvency business has been thinking the other shoe is gonna drop, the shoe is gonna drop, and it never does,” said Pat O’Keefe, founder and CEO of Bloomfield Hills-based consulting and restructuring firm O’Keefe & Associates Inc. “I would tell you, the (rise) of inflation, lack of liquidity in terms of PPP money, and a potential downturn in the economy in the next 12 months has got to mean that there’s going to be people that are not going to be able to survive. Now what sector that is, I think, remains to be seen.”
Since the start of the COVID-19 pandemic last year, the overall bankruptcy market has fallen off by more than 20 percent, according to Epiq Global, which tracks global bankruptcy filings.
In Michigan last year, as the economy took a beating from the pandemic and business closures were rampant, there were just 104 filings for Chapter 11 protection, which is most frequently used by businesses for purposes of restructuring, according to figures from the American Bankruptcy Institute.
But Swanson and others in the bankruptcy space acknowledge it’s unlikely to remain this quiet for much longer.
“If you file for bankruptcy, it doesn’t mean you’re a bad company. You just didn’t have a strong enough balance sheet to weather this volatility and margin compression,” Wybo added. “So the short answer is ‘yes.’ I think (private equity is) chomping at the bit. There hasn’t been a lot of M&A activity in the distressed world. There are lots of distressed funds … that are focused on this kind of thing, and frankly, they haven’t had much to do the last couple of years.”