Even as bank lending in Connecticut appeared to thaw slightly in the past month, regional experts say that the stalled credit markets have frozen an important protection for businesses ”“ Chapter 11 bankruptcy proceedings.
According to a survey by the Connecticut Business and Industry Association and TD Bank, 53 percent of respondents to a recent survey said they don”™t expect Connecticut”™s lending environment to worsen in the current quarter, with only 44 percent of those surveyed making that assertion in the third quarter.
“Many Connecticut businesses are relying on credit for day-to-day operations,” said Michael Schweigoffer, president of TD Bank”™s operations in Connecticut, in a prepared statement. “As we move into 2009, their success will depend on availability of the funds they need and having access to those funds.”
For businesses teetering on the edge of solvency, traditional “take-out” financing that extricates borrowers while extracting a large piece of their equity is largely unavailable, according to Frederick Gold, chairman of the litigation practice in Shipman & Pullman who addressed the topic in December at a meeting of the New England Roundtable.
In a recession of this scale, Gold said that the last thing lenders want right now is to take possession of a piece of real estate; or an asset like a business. Gold said he expects there will be purchase opportunities in real estate, in which developers lack the cash or credit to complete a project already under way, and said those kinds of deals could help prime the economic pump anew at some point.
“The un?nished project is sitting there,” Gold told the New England Roundtable, which is affiliated with the Council of Supply Chain Management Professionals. “That may be a buying opportunity for somebody with cash who wants to invest a long dollar. Sooner or later, such opportunities are going to help jumpstart the economy.”
In the same panel, Day Pitney L.L.P. partner Dan Carragher noted that corporate America”™s embrace of so-called virtual business models that emphasize the lease of buildings, equipment and people have left some companies light on assets that could be used as collateral on loans when they are needed most.
Carragher said that a Chapter 11 bankruptcy, which allows a company to restructure under protection from creditors, is far harder for businesses to undertake due to difficulties in obtaining financing to carry things over until the bankruptcy process is complete.
Indeed, at a Chicago forum sponsored last week by the Turnaround Management Association, a seminar examined “busted distressed financings,” the impact of the credit crunch on debt and equity exit financing.
Still, Chapter 11 reorganizations nationally jumped by more than 75 percent in the third quarter ending September 30, according to the American Bankruptcy Institute (ABI). That was ahead of the pace of Chapter 7 liquidations, which were up 65 percent between the third quarters of 2008 and 2007.
Surprisingly, the pace of consumer bankruptcies grew at just a third, a slower pace than in 2007 when they spiked 40 percent from 2006. ABI entered last year predicting the pace of individual bankruptcies would increase this year as adjustable mortgages reset to higher rates,
Five things need to happen for the credit markets to return to normal functioning, according to Thomas Miele, a senior vice president with Fairfield-based General Electric Co., who described the steps in a GE Capital newsletter last month. As Miele sees it, spreads need to improve on loans traded on a secondary basis; banks need to improve balance sheets; the credit-default swap market must stabilize; commercial paper must rebound; and the LIBOR interest rate banks use to borrow funds overnight must drop.
