By now everyone knows that one fifth of LL corporations are “zombies” – companies that should be out of business as they are technically insolvent and don’t even generate enough cash flow to meet their debt obligations, but continue to exist thanks to either record low rates which allow them to issue even more debt and use the proceeds to pay for existing interest expense (and roll over debt maturities), or government handouts which perpetuate their pathetic, deflationary existence.
But did you know that there are now reincarnated zombies: companies which were in such a dire state they did file for bankruptcy despite the Fed’s unprecedented monetary generosity… and yet shortly after they “unfiled” just so they would be eligible for government “stimulus”?
As Bloomberg’s Steven Church puts it, say your business needs a bailout from the federal Paycheck Protection Program, but you’ve already gone bankrupt, making your firm ineligible. Tough luck, right? Well, maybe not.
Such is the pathetic state of modern capitalism that some companies have “unfiled” for bankruptcy, arranged a PPP bailout loan, and then almost immediately refiled for bankruptcy. They range from a rural Texas hospital to a group of pizza joints in Tennessee and a Portland, Oregon firm that
As Church explains, “the logic behind the PPP law was to ensure money went to save jobs, not to prop up failing companies, said Las Vegas bankruptcy attorney Brett Axelrod. But Congress didn’t do its homework. There isn’t any real difference between a company that can’t pay workers during a pandemic without a government loan and one forced into bankruptcy by a pandemic, she said.”
“The government really wasn’t thinking it through,” Axelrod said. “What do companies do in a pandemic? They file for bankruptcy.”
And in this case, they then unfile to get some more taxpayer cash for which they are only eligible if they are out of bankruptcy court… and then immediately file again!
According to Bloomberg, a proposed change to the law could make such legal contortions unnecessary, but only if Congress is willing, during an election year, to vote to give federal aid to bankrupt businesses. Faith Community Health System in rural, northern Texas “unfiled” its Chapter 9 case in May,