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.

Nationwide, through August, there were 2,676 Chapter 11 filings, compared with 7,129 in all of 2020 and 5,519 in 2019, according to data from Epiq.

Michigan saw 104 filings in 2020. That’s a far cry from the Great Recession years such as 2008 and 2009, when there were 250 and 259 filings, respectively, according to ABI figures.

Whereas in those years, the state’s auto-reliant economy was the Achilles’ heel, it’s now what’s helping keep bankruptcies at bay, according to Steve Wybo, senior managing director in the Birmingham office of turnaround firm Riveron Consulting LLC.

“If you think about Michigan and automotive, it’s mainly a middle-market business. You’ve got the OEMs and the Magnas, but for the most part it’s a couple thousand suppliers with under $1 billion in revenue,” said Wybo. “So if you think about an average middle-market industrial company, the government has really propped that up for the last 18 months.”

Federal legislation passed just before COVID-19 slammed the U.S., as well as provisions in the CARES Act, passed in the wake of the pandemic, have also helped keep corporate bankruptcies at bay, according to Marc Swanson, a principal and bankruptcy group leader in the Detroit-based law firm of Miller Canfield Paddock & Stone PLC.

But Swanson and others in the bankruptcy space acknowledge it’s unlikely to remain this quiet for much longer.

“It seems inevitable that more companies will have to turn to bankruptcy to reorganize and shore up their balance sheets,” said Swanson.

Indeed, ongoing disruptions in supply chains — sometimes called the “bullwhip effect” — coupled with rising inflation means that companies all but assured to begin feeling pressure on their balance sheets and turn toward restructuring, said Wybo, who said he’s not expecting a flood like was seen a decade ago, but still expects a substantial uptick in the coming months.

So what happens, should the uptick begin to take effect?

To be sure, some companies will file for Chapter 7 bankruptcy, liquidate and simply go out of business. Many will likely take the Chapter 11 route, restructure, shave off debt and emerge a company with a healthier balance sheet.

Additionally, some companies entering bankruptcy could be seen as bargains to be acquired in an otherwise frothy M&A market, which is likely to be an attractive option for some, notes Wybo, who said that again, there’s a distinction from the Great Recession years.

“A lot of these companies are good companies and unlike the Great Recession when we had a lot of not great companies. We had too much capacity,” said Wybo.

“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.”