KEY POINTS

  • The number of commercial Chapter 11 filings by U.S. companies rose by 17% in August on a year-over-year basis
  • Through the first eight months of this year, Chapter 11 commercial filings have climbed by 28%
  • The number of Chapter 11 filings this year far exceeds the activity in 2009

Many well-known companies have filed for bankruptcy this year as the COVID-19 pandemic has damaged the operations of a wide swath of industries.

From retailers Brooks Brothers, Neiman Marcus and JC Penney to auto rental giant Hertz to fracking pioneer BJ Services, another prominent firm seems to collapse every week.

The number of commercial Chapter 11 filings by U.S. companies rose by 17% in August on a year-over-year basis – from 449 to 525.

Epiq, a legal services firm, also said that through the first eight months of this year, Chapter 11 commercial filings have climbed by 28% – to a total of 4,779 – over the same period last year.

“While we still see growth year-over-year in Chapter 11 commercial filings, the pace has slowed down significantly over July,” said Deirdre O’Connor, managing director of corporate restructuring at Epiq. (In July, the pace of such filings had surged by 52% over the prior year).

“Large corporations are benefiting from robust capital market activity, which is providing access to capital at an attractive cost,” O’Connor said. “However, smaller companies are not experiencing the same market dynamics to access liquidity and will consider seeking protection in a bankruptcy.”

O’Connor added that the retail, energy, entertainment, travel and leisure sectors lead the pack in bankruptcy filings.

Moreover, the number of Chapter 11 filings this year far exceeds the activity in 2009, during the darkest days of the global financial crisis. According to data compiled by Epiq, this year’s pace represented a 58% increase in the number of filings compared to 2009.

Marta Alfonso, a principal at MBAF, a public accounting firm, told International Business Times that while there is no empirical study of the reasons why companies have filed for bankruptcy in 2020, it is “fair to say that many prominent companies we know had a mix of financial and operating issues arising from the pandemic and other market, business, or operating factors that could not be mitigated once the pandemic occurred.”

Gregory Petrick, a partner and chair of the financial restructuring group at legal firm Cadwalader, Wickersham & Taft, told IBT that the pandemic has accelerated the filing for bankruptcy protection by companies already facing difficult challenges pre-COVID.

“Retailers are the prime examples,” he said. “Hertz is another. The pandemic’s long-term impact on businesses that may need to seek bankruptcy relief are yet to be determined.”

Alfonso said she thinks the pace of corporate bankruptcies may increase this year until the “market stabilizes at a new normal operating rate once we are able to mitigate the impact of the COVID-19 virus.”

Petrick noted that most restructuring professionals anticipate more bankruptcy filings in 2021.

“But that is uncertain,” he cautioned. “Many lenders thus far have been patient in electing not to enforce on defaults, in large part because taking the collateral in this market is not attractive. That does not seem likely to change. Lenders with few exit options may be forced to continue to be patient.”

Furthermore, Petrick noted, the liquidity provided by government support through debt buying and other programs has helped to prevent a “watershed meltdown” for companies.

“The Fed has signaled an intent to continue this effort and that should reduce pressure,” he said.

Aside from energy and retail, companies engaged in the hospitality industry, personal service businesses, travel, and entertainment have also been ensnared by bankruptcies.

“I think when consumers conserve their disposable income for necessities or are unable to be social due to restrictions related to the pandemic, any businesses that rely on discretionary spending can also be affected,” Alfonso noted.

Petrick pointed out that after the 9-11 terror attacks, the travel and hospitality industry businesses took years to recover to normal volumes. “Industry participants estimate the recovery from COVID may require five years before people resume travel at the 2019 pace,” he warned.

Brick-and-mortar retailers are prime examples of where we will likely see more liquidations, Petrick added.

Some private equity firms have entered the fray by buying up bankrupt companies this year.

“There are definitely market opportunities for private equity firms that have the capital, understanding of the industry and know the opportunities to add or create value, and that can execute a well-organized business plan,” Alfonso noted.

Petrick indicated that private equity firms have been active participants in bankruptcy cases through “loan-to-own” and other strategies for at least two decades.

“Private equity is sitting on an enormous amount of dry powder capital that the industry is anxious to deploy,” he stated. “This has been frustrated to some degree by government support programs which have decreased potential investment opportunities.”

As for more big name firms going bankrupt in the near term, Alfonso said that companies at risk for filing are simultaneously exploring other options for capital and liquidity to emerge from the pandemic in a stronger financial position for the future, or exploring other exit strategies.

Companies that can avoid bankruptcy, she stated, are usually those that “successfully manage their cash, maintain an open dialogue with their stakeholders and suppliers, are responsive to customers, and are agile in their response to events which are outside of their control.”

One must wonder why corporate bankruptcies are rising when the stock market is flourishing.    But Alfonso points out that a strong economy does not necessarily mean that companies or industry sectors will not experience financial distress.

“There are many internal and external business factors that can create financial distress and cause a company to file for bankruptcy, restructure its debt, or restructure its operations,” she concluded.