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Over the past two years, economic conditions have impacted seemingly every Hoosier debtor and creditor.
From multimillion-dollar capital projects to small business and home loans, finance and banking attorneys have stayed busy working with their clients and banks to keep up with inflation challenges.
According to an analysis by U.S. Bank released Jan. 17, the cost-of-living, as measured by the Consumer Price Index, rose 7% for 2021. That was the highest calendar-year reading since 1981 and sharply contrasted with the trend over the past 40 years, when inflation averaged 2% to 3% annually.
In 2022, inflation continued rising at historic levels.
U.S. Bank found that during 12-month period ending in June, the CPI rose 9.1% — the largest inflation spike for a 12-month period since November 1981.
The CPI had lowered to 6.5% by the end of 2022 and is now showing more favorable trending, but elevated interest rates prompted by the Federal Reserve have continued to cause concern.
Between interest rates, labor shortages, supply chain issues, the ongoing war in Ukraine and the aftereffects of COVID-19, debtors and creditors are facing some uncertainties, attorneys say.
At the same time, lawyers say there isn’t evidence that the current economic downturn will have the same ramifications as the Great Recession, and their work is as busy as ever as deals are still being closed.
Projects still moving forward
Josh Christie, a partner in Ice Miller’s Business Group, works on mergers and acquisitions, corporate transactions, joint ventures, commercial agreements, general corporate matters and financing transactions, among other practices.
Christie said his clients — particularly those in real estate and construction — and banks are being more cautious before closing on deals, but not due to the rising cost of money.
Rather, he said the main issues for his clients have been situations in which they need to close a deal within 60 to 90 days, as they can’t predict what the interest rates or cost of materials will be at the end of that time period.
“We’re not seeing our clients kind of saying, ‘Well geez, I can’t do these deals anymore because money’s just too expensive,’” Christie said. “… They’re waiting for some certainty here with interest rates. We’re not hearing people say, ‘I can’t get the deals done, because of the cost of money.’ They’re saying, ‘Well, I can’t figure out what a deal is going to cost me until I know what the interest rate’s going to be at closing.’”
From the banking perspective, Todd Etzler, general counsel and executive vice president at Horizon Bank, said business and commercial loans have remained steady in Indiana.
“For Indiana banks, I think that most of us have seen that the professional builders, the professional developers, the businesses that are solid are continuing to borrow and move forward,” Etzler said. “The interest rates obviously hit small businesses harder because they have less flexibility and less capital. But we haven’t seen a material slowdown in the business side of it for our lending.”
Sarah Riordan is the executive director and general counsel for the Indianapolis Local Public Improvement Bond Bank. The organization — which is an agency of local government that serves as the debt issuance and management arm for the city of Indianapolis — has issued nearly $13 billion in bonds and notes on behalf of various entities of the city and Marion County.
While rates have increased on bonds — with Riordan giving the example of the 3.8% rate in 2019 for the Marion County Community Justice Campus project compared to the 5.4% interest rate in 2022 — she said projects are still pushing forward and the deals in the pipeline haven’t had any hiccups with the banks. Recently, the public improvement bank helped secure a $25 million upgrade for the City Market and Dr. Martin Luther King Park in
downtown Indianapolis.
“So far, (the rising interest rate) hasn’t put an end to any of our projects, but we do have to sharpen our pencils,” Riordan said. “And we have to keep our project costs down as much as we can, and sometimes that means we have to value-engineer a project.”
Riordan noted that the municipal finance space is unique, because it deals with money borrowed on behalf of government entities that have relatively stable credit ratings compared to commercial banking.
Small businesses impacted most
While many mid- and larger-sized businesses have continued to secure funding and survived rising costs, small businesses haven’t always been as lucky.
The U.S. Chamber of Commerce reported in its Small Business Index for Q3 of 2022 that 50% of small businesses say inflation is the top challenge currently — a 31-point increase since this time last year — while 71% believe that the worst is yet to come. Overall, the SBI for Q3 was 62.1, which is the largest drop since the start of the pandemic.
Wes Overturf, an attorney at Kroger Gardis & Regas who practices in bankruptcy and creditors’ rights representing both creditors and debtors, said the margins are currently a lot smaller for companies big and small.
“Net profit for companies has become a lot smaller, and when banks are looking at refinances or restructurings or things like that, not only do the profit and losses look a little worse than they used to — or a lot worse and some cases — but the balance sheets are looking different,” Overturf said. “What was a bankable borrower a year ago may not be now because there’s not enough margin, the balance sheet isn’t quite as healthy and whatever the net profit was a year ago is a lot smaller now.”
One of the issues Overturf said he has seen recently has been cases concerning merchant cash advances, which he described as a type of commercial payday loan that draws daily or weekly payments.
With interest rates sometimes north of 25% on MCAs, Overturf said some clients are getting themselves into real trouble.
“… The borrowers are doing this and they’re granting liens against their future receivables, which is a problem for banks because usually banks have a blanket lien on accounts receivable and … intangible assets,” Overturf said. “They’re doing this to try to resolve a short-term cash-flow issue and what they’re doing is they’re actually making their problem worse, because they create an even longer-term cash-flow issue.”
Learning from the pandemic
Attorneys both in-house and at law firms say the relationships between creditors and debtors largely strengthened following the COVID-19 pandemic.
Due to many payments being delayed or restructured, the banks that tended to their customers’ needs have continued to do well, Etzler said.
“Indiana really took care of their customers and their employees during COVID,” Etzler said. “And we all stepped up with the (Paycheck Protection Program) loan programs and the other funding that the federal government elected to funnel through and have the banks assist in distributing those federal funds. And I think that it’s a pretty universal opinion that the banking system really did a good job with those programs in an environment where regulations concerning the money that you were about to distribute were changing every day.”
With COVID restrictions now lifted, Overturf said he thinks banks are starting to enforce their loans when they default.
No matter what the economic outlook is the near future, Christie said many in the industry aren’t panicking.
“We are very much taking the same approach as everyone else’s, and (that’s being) cautiously optimistic,” Christie said. “We’re not planning for the worst-case scenario, but we’re making sure not to assume the best-case scenario. And I think, you know, we’re trying to help our clients navigate through what they’re facing.”•
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