United States: The Year In Bankruptcy: 2013

The eyes of the financial world were on the U.S. during 2013. The view was dismaying and encouraging in roughly equal parts. The U.S. rang in the new year with a post-last-minute deal to avoid the Fiscal Cliff that kicked negotiations over "sequestration"—$110 billion in across-the-board cuts to military and domestic spending—two months down the road, but raised income taxes (on the wealthiest Americans) for the first time in two decades.

Any spirit of bipartisanship was short-lived. Congress, dysfunctional even by recent standards, fought tooth and nail over nearly everything during 2013. Early in the year, lawmakers failed to engage in meaningful dialogue about raising the nation's debt ceiling, which led to speculation as to whether the U.S. Treasury, under an obscure law meant to apply to commemorative coins, would mint a "trillion-dollar coin" to head off the debt-ceiling battle in Congress.

Legislative gridlock meant that the sequestration "poison pill" began to take effect on March 1, 2013.

The Capitol Hill donnybrook escalated into an all-out war over the implementation of ObamaCare (the Affordable Care Act) that brought many parts of the U.S. government to a halt on October 1, 2013, throwing 800,000 federal employees out of work temporarily. The shutdown lasted 16 days and has been estimated by Standard & Poor's ("S&P") to have drained $24 billion from the U.S. economy.

U.S. unemployment during 2013 remained stubbornly high, albeit gradually decreasing, ranging from a high of 7.9 percent at the end of January to a low of 6.7 percent at year-end, compared to the 4.9 percent unemployment rate in December 2007 prior to the Great Recession.

On September 17, the U.S. Census Bureau reported that, years after the end of the Great Recession and shortly before the 50th anniversary of President Lyndon Johnson's declaration of a "war on poverty," 46.5 million Americans are still living in poverty. Moreover, U.S. food stamp cuts took effect on November 1, 2013, affecting nearly 48 million people, or one in seven Americans. On December 28, long-term unemployment benefits implemented in 2008 pursuant to a federal emergency relief program expired for 1.3 million jobless U.S. workers after an extension of the program was omitted from a two-year budget deal reached at year-end.

According to the U.S. Consumer Financial Protection Bureau ("CFPB"), there are more than 38 million U.S. student loan borrowers, with more than $1.1 trillion in outstanding debt. In mid-2013, 850,000 private student loans were in default, with an outstanding balance of approximately $8 billion. On July 1, 2013, interest rates on U.S. federally subsidized Stafford student loans doubled from 3.4 percent to 6.8 percent after Congress failed to reach a deal to avert the rate hike. On August 9, however, President Obama signed a measure rolling back the increase.

Now for the good news. In April 2013, the U.S. Treasury announced that, for the first time since 2007—before the recession—it planned to make a down payment on the federal debt.

The U.S. government reported rare surpluses of $113 billion and $116.5 billion in April and June, the largest in five years and a sign of the nation's improving finances. On October 30, the government reported that the budget deficit for fiscal year ("FY") 2013 dropped to $680.3 billion, the first time in five years that the shortfall was below $1 trillion. Although it remains the fifth-largest deficit in history, it is the lowest since 2008 ($458.6 billion).

On December 10, five U.S. federal agencies voted to approve the "Volcker Rule," the keystone of the most sweeping overhaul of financial regulations since the Great Depression. At its core, the rule bans banks from most forms of proprietary trading for their own accounts, one of Wall Street's most lucrative—and riskiest—activities.

Six banks settled charges in 2013 regarding questionable mortgages packaged and sold to Fannie Mae or Freddie Mac during the housing crash: Bank of America/Countrywide Financial ($10 billion), The Royal Bank of Scotland ($153.7 million), JPMorgan Chase ($13 billion), Deutsche Bank ($1.9 billion), Wells Fargo ($591 million), and Citigroup ($968 million). In addition, the U.S. Justice Department filed criminal charges against S&P accusing the firm of inflating ratings of mortgage investments that collapsed when the financial crisis struck.

On December 18, the U.S. Federal Reserve announced that it would reduce its purchases of Treasury bonds and mortgage-backed securities by $10 billion a month beginning in January 2014, a signal that it feels confident enough about the economy that it can dial back its "quantitative easing" ("QE3") strategy.

On December 26, President Obama approved a bipartisan two-year budget that alleviates the harshest effects of automatic budget cuts on the Pentagon and domestic agencies, ending the threat of another partial government shutdown in January 2014.

According to Thomson Reuters, while global deal making was basically flat for a fourth consecutive year, deal volume in the U.S. was up 11 percent in 2013 compared with 2012. U.S. companies announced more than $1 trillion worth of deals during the year, the most since the financial crisis. That led the U.S. to account for 43 percent of all deals worldwide, the biggest proportion since 2001.

MARKETS

With a few notable exceptions in Asia, markets had a banner year in 2013. The Dow Jones Industrial Average (the "Dow") closed at 16,576.66, up 26.5 percent for the year. The NASDAQ Composite Index ("NASDAQ") finished the year up 38 percent, and the S&P 500 Stock Index ("S&P 500") ended the year 30 percent higher.

Japan's Nikkei 225 ended 2013 up 56.7 percent, its best performance in 40 years. Next to Japan, Europe was the surprise gainer of the year. The Stoxx 600, a pan-European equity benchmark, gained 17 percent in 2013; the DAX in Germany ended the year up 25.5 percent; France's CAC 40 rose 18 percent; and the FTSE 100 in London was ahead 14.4 percent.

Chinese markets had a disappointing year. The benchmark Shanghai Composite Index ended 2013 with a decline of 6.8 percent from a year ago.

SNAPSHOT ABROAD

Europe continued to struggle in 2013. The 17-nation eurozone and the 28-member European Union ("EU") continue to be plagued by high unemployment of as much as 12.2 percent and 10.9 percent, respectively. The credit ratings of Britain, Italy, France, and the EU were downgraded by ratings agencies during 2013—a first for Britain.

In April 2013, the EU was forced to provide Cyprus with a €10 billion bailout package intended to keep the country in the eurozone and rebuild its devastated economy. Ireland— the poster child for the alleged utility of austerity measures as a path to economic recovery—slid into its second recession in three years during the first quarter of 2013.

On May 5, 2013, French Finance Minister Pierre Moscovici declared the era of austerity over. A little more than one month afterward, France's National Institute of Statistics (Insee) reported that Europe's second-largest economy fell into recession in the first quarter of 2013.

Even so, 2013 was not without positive developments in Europe. Eurostat, the EU statistics agency, reported on August 14 that Europe broke out of recession in the second quarter of the year amid stronger domestic demand in France and Germany, ending a six-quarter downturn.

Asia faced its own challenges in 2013. Early in the year, the Japanese government approved emergency stimulus spending of more than ¥10.5 trillion ($100 billion) in an aggressive push to jump-start the moribund performance of the world's third-largest economy.

The manufacturing sector in China—the world's second-largest economy—faltered during 2013, underscoring the fragile nature of the global recovery and the difficulties still facing the world's biggest economies.

On August 30, the Central Statistical Office in New Delhi reported that India's economy slowed in the summer of 2013 to its weakest pace since the bottom of the global economic downturn in 2009.

On June 21, Russian President Vladimir Putin announced an ambitious but risky economic stimulus program that would dip into the country's pension reserves for loans of as much as $43.5 billion for long-term infrastructure projects and other investments.

BANKRUPTCY FILINGS

Fewer Americans filed for bankruptcy in 2013. According to data released by the Administrative Office of the U.S. Courts ("AOUSC"), 1,072,805 individuals filed for bankruptcy protection under chapter 7, 11, or 13 in the fiscal year ending September 30, 2013—730,592 under chapter 7 of the Bankruptcy Code, 340,807 under chapter 13, and 1,406 under chapter 11, with an additional 406 "family farmer" filings under chapter 12 of the Bankruptcy Code. This represents a 5 percent decrease from the 1.13 million individual bankruptcy filings in FY 2012.

The calendar year ("CY") 2013 statistics reflect an even more pronounced drop-off in individual bankruptcy filings. According to data provided by Epiq Systems, Inc. ("Epic Systems"), the 988,215 total noncommercial filings during CY 2013 represented a 12 percent drop from the noncommercial filing total of 1,128,173 during CY 2012. Epic Systems predicts that annual bankruptcy filings will continue to drop amid sustained low interest rates and high filing costs.

Business bankruptcy filings dropped off in both FY and CY 2013. According to the AOUSC, business bankruptcy filings in FY 2013 totaled 34,892, down 17 percent from the 42,008 business filings reported in FY 2012. Chapter 11 filings fell to 9,564 (8,158 business and 1,406 nonbusiness cases), down 10 percent from the 10,597 chapter 11 filings reported in FY 2012.

According to court data compiled by Epiq Systems, total commercial bankruptcy filings during CY 2013 were 44,111, a 24 percent drop from the 57,964 filings during CY 2012. There were 6,577 business chapter 11 filings in CY 2013, compared to 7,783 filings in CY 2012, a decline of approximately 15 percent. Total chapter 7 commercial filings numbered 27,617 in 2013, compared to 37,221 in 2012, representing a decline of 26 percent. Once again, the drop-off can be attributed to a number of factors, including the continuation of an "amend and extend" (or "extend and pretend") mentality by many lenders loath to redeploy capital in a market with historically low interest rates.

The number of bankruptcy filings by "public companies" (defined as companies with publicly traded stock or debt) in 2013 was 71, according to data provided by New Generation Research, Inc. ("NGR"). There were 87 public-company filings in 2012, whereas 86 public companies filed for bankruptcy in 2011, 106 filed in 2010, and 211 sought bankruptcy protection in 2009. NGR also reported that, reflecting a growing trend, there were 17 prepackaged chapter 11 cases in 2013, versus 11 in 2012 and only four in 2011—with combined total asset figures of $14 billion, $8 billion, and $3 billion, respectively.

The year 2013 added 10 public-company names to the billion-dollar bankruptcy club, compared to 14 in 2012, 12 in 2011, 19 in 2010, and 52 in 2009. Counting private-company and municipal filings, the billion-dollar club gained 13 members in 2013. This represents the fewest additions to the roll of billion-dollar bankruptcies since 2007, prior to the Great Recession.

The largest bankruptcy filing of 2013—Cengage Learning Inc., with $7.5 billion in assets—was not even within the top 50 largest filings of all time, based upon asset value.

Twenty-four public and private companies with assets greater than $1 billion exited from bankruptcy in 2013—including seven of the 10 billion-dollar public companies that filed in 2013. Perhaps signaling a trend begun in 2012, more of these companies reorganized than were liquidated or sold.

Two of the most prominent names on the list were MF Global, which failed spectacularly on Halloween 2011 to become the eighth-largest bankruptcy of all time, but ultimately provided a 100 percent recovery to customers, and AMR Corporation, the parent of American Airlines, which emerged from bankruptcy after its $11 billion merger with US Airways Group, Inc., as American Airlines Group Inc.—the world's largest air carrier.

The year 2013 saw the largest bankruptcy filing by a U.S. city ever—Detroit—juxtaposed with the continuing financial limbo of a U.S. commonwealth in crisis—Puerto Rico. Under the protective umbrella of chapter 9, Detroit will attempt to implement a plan of adjustment to manage $18 billion in long-term liabilities, including unmanageable employee legacy debts. Puerto Rico, by contrast, is being crushed by $70 billion in widely held public debt (at $19,000 per citizen, four times the per capita debt of the most indebted U.S. state, Massachusetts) and 15 percent unemployment; yet, due to its status as an unincorporated territory of the U.S., it is barred from seeking either protection under the Bankruptcy Code or international financial assistance.

S&P reported on January 9, 2014, that the number of global corporate defaults for 2013 tallied 78, compared to 84 corporate defaults during 2012. Of the 78 defaults in 2013, 34 were due to missed interest, principal, or cash payments; 19 were due to bankruptcy filings; 15 resulted from distressed exchanges; seven were confidential; two were due to regulatory supervision (administration); and one resulted from a failure to refinance or pay off a revolving credit facility. The majority of the defaulters in 2013 were based in the U.S., with 43 issuers defaulting in 2013 compared with 47 in 2012. Defaults in Europe, however, grew substantially, from nine issuers in 2012 to 16 in 2013. The media and entertainment sector—which includes companies as diverse as Atlantic City, New Jersey, casino Revel and Yellow Pages directory publisher SuperMedia—put 19 names on the global default tally and is considered among the most distressed sectors of the economy by S&P.

Twenty-four U.S. banks failed in 2013, compared to 51 in 2012 and 92 in 2011. The 2013 total represents the fewest since 2007, before the financial crisis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Mark G. Douglas
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