Brattle Associate Julia Zhu has authored a Law360 article on the heightened distress and bankruptcy risks resulting from the coronavirus (COVID-19) pandemic.
As the spread and severity of COVID-19 escalates around the globe, the travel and hospitality industry has already experienced drastic declines in demand and revenue due to decreases in economic activity and supply chain disruptions. As its impact continues to unfold, the pandemic will also likely bring heightened bankruptcy risks to a wide range of industries. The shock to the U.S. business ecosystem includes, but is not limited to, supply chain disruptions, declining demand, operational challenges, and dislocations in the financial markets.
The magnitude of COVID-19’s economic impact will depend on the duration and severity of the pandemic, as well as the timing and magnitude of the subsequent rebound in economic activity. Government intervention aimed at containing the disease and providing liquidity to the financial markets will play a significant role. Despite recent policy responses, such as the Federal Reserve rate cut and the proposed government emergency stimulus packages, market participants are increasingly concerned about the turn of the tide in the credit and economic cycle.
The restructuring and bankruptcy industry has already begun to see the ripple effects of COVID-19. Since February, several companies have filed for bankruptcy citing the outbreak, which exacerbated existing operational or financial problems and became the last straw. Companies with higher fixed costs and/or higher leverage are more likely to become distressed, as they may be unable to flatten the curve of depressed earnings and unable to refinance when liquidity in the credit market dries up. As COVID-19-related bankruptcies increase, various types of bankruptcy-related litigation are likely to ensue.
The full article, “The Rising COVID-19 Bankruptcy Risks,” can be found below.