Business bankruptcies nosedive
Business bankruptcy filings are down in South Florida, attributable say industry experts, to an improving economy led by a solid real estate market and low interest rates.
Some analysts expect bankruptcies to continue declining but see possible hurdles with the strong dollar’s potential to slow foreign investment and inevitable increase in the federal funds rate.
“For the near term, the economy in South Florida will continue to improve and I don’t see anything that will slow it down,” said Jordi Guso, partner at Berger Singerman and chairman of its business reorganization team. Generally, he said, restructuring and business bankruptcy filings are down now that the market has rebounded well and a lot of capital is coming into South Florida.
Mr. Guso said the main drivers of South Florida’s economy are the hospitality industry and real estate.
“Holders of foreign capital feel Miami is a safe bet compared with the uncertainty that exists in other places,” he said. “The low-interest rate environment has helped tremendously, increasing purchasing power, and Miami is seen as a hot place.”
According to statistical reports published by the US Bankruptcy Court for the Southern District of Florida, there were 59 filings for Chapter 11 in the first quarter of 2015 compared with 87 in the first quarter of 2014. During the worst years of the recession, between 2008-2010, filings for the first quarter averaged 91.
Chapter 11 bankruptcy, with no limit regarding the amount of money owed by the debtor, was originally only intended for large corporations, but individuals can now file Chapter 11 as well.
In addition to the low-interest rate and strong real estate market in South Florida that could help reduce filings, Mr. Guso said stakeholders in a troubled company are more keenly focused on trying to find an out-of-court solution as opposed to an in-court restructuring through a bankruptcy filing. “Lenders, in particular, are exploring less costly and more efficient alternatives to a Chapter 11 restructuring,” he said.
The only likely catalyst for change in business health that Mr. Guso sees is the raising of interest rates. When the corporate cost of borrowing goes up, he said, there’s less cash to run a business.
Moreover, Mr. Guso said, some voices in the industry express caution about the strengthening US dollar and how it will affect foreign markets. There’s concern, he said, about how much real estate prices have gone up and if the rise is sustainable.
Timing is everything in the real estate market and developers need to know when to get out, said Joseph Luzinski, senior vice president of Development Specialists Inc. Right now, he said, the market is healthy but real estate – historically on a rollercoaster in South Florida – ebbs and flows, so it’s difficult to say how long the boom will last.
Mr. Luzinski said business bankruptcy filings have been trending down for several years, a fact he attributes in part to a lot of “businesses on the fringe getting cleaned out in the great recession.”
Additionally, Mr. Luzinski said, a lot of lenders did not want to address problems and let some businesses “limp along.”
He suspects that for the last few years a lot of businesses had loans keyed to the prime rate, which allowed them, even if not financially healthy, to keep going. “The increase [in interest rates] will kick those loans up,” Mr. Luzinski said. “That will precipitate another wave of businesses seeking liquidation or restructuring.”
Not every market analyst sees a coming increase in interest rates as a definite roadblock to South Florida’s robust economy, however. Developer Avra Jain, a former Wall Street executive, said even if the Federal Reserve Bank does raise rates modestly, the spread is wide enough between current loan rates and the federal funds rate to adequately absorb the shock.
Right now, Mr. Guso said, there’s nothing by way of pending legislation for the bankruptcy code. The last time it was amended was in 2005 to accelerate the pace of restricting.
The American Bankruptcy Institute commissioned a study for what people in the bankruptcy business would like to see changed, which sparked a discussion that “may or may not make its way to an amendment in the law,” but Mr. Guso does not foresee any bankruptcy reform on the horizon in the near future.