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Corporations in America may be struggling, but they’re not filing for bankruptcy. In fact, since hitting a 15-year peak in the second quarter of 2009, filings have dropped an average of 3.2 percent per quarter, according to figures released by the American Bankruptcy Institute. Sounds like a beacon of light in an otherwise dark and dismal economic landscape, right? Don’t be fooled, says Lloyd Palans, a bankruptcy expert in the New York office of Bryan Cave. “The dilemma that we are in with the downward spiral of business bankruptcies is a result of what I’d call a perfect storm,” says Palans. He says the drop—from 16,014 in 2009 to 12,304 in the most recent quarter—is the result of a confluence of conditions never before experienced. “You really have to go back to the spring of ’07, when the capital markets crashed,” says Palans. “At that time, banks stopped lending to each other, the credit markets froze, and global markets were in turmoil.” In the bankruptcy realm, debtor-in-possession financing and exit financing dried up. The crash came on the heels of a wave of 2005 bankruptcy amendments that also impacted a debtor’s ability to operate under Chapter 11 bankruptcy protection. Those provisions placed strict time restrictions on a debtor’s right to file an exclusive plan of reorganization and increased the costs of declaring bankruptcy. The new provisions “limited severely the number of business bankruptcies,” says Palans. In his practice—which includes both lenders and businesses of various sizes—Palans is seeing banks holding an unprecedented number of underperforming and nonperforming loans. He says those banks are not standing in line to buy failed institutions. “Lenders are kind of like the boa constrictor that swallows a beach ball,” he says. “They’re got all these loans and no pressure to move them out.” But if that has to change eventually, what will cause lenders to take action? “There are huge maturities coming in 2014 and 2015,” says Palans. They will move to specialized servicers obligated to take enforcement action, and he says, “Something’s got to happen at that point.” When companies do file for bankruptcy today, they tend to have a parachute in tow. “Free-fall” cases have been all but eliminated, says Palans. Instead of filing for Chapter 11 without knowing when they’ll exit, which businesses will remain intact, and who is going to own them when they come out, companies are negotiating before they leap. His lender clients express concern about their capital—about lending and making decisions in this uncertain environment, and enforcing their rights. Borrowers, on the other hand, are concerned about cash flow. Depending on the industry, corporate clients are concerned about whether there will be available users of their services. They’re weighing the decision to make investments—including adding new employees—against the uncertainty of the current environment. Palans is still seeing a lot of activity among captive lenders, strategic buyers, and entities dealing with legacy claims. All of which means there are opportunities for corporations. “Corporations with liquidity and credit availability can opportunistically advantage themselves,” says Palans. “Strategic opportunities abound today that weren’t present five years ago. The use of the process for strategic buyers is still there, and I think that’s a wonderful opportunity to examine in this environment.”

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