Here comes the (bankruptcy) Boom
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Claire Williams // September 24, 2020
The COVID-19 Pandemic has hit the global economy in a way no one was prepared for. With such a tremendous financial loss over (see our full report of the hardest hit industries) only a few short months, countries around the world have been forced to institute ‘re-opening plans’, even with the number COVID-19 cases at an all time high, in an attempt to salvage the economy.
However, even with quarantine restrictions being lifted, commercial bankruptcy filings have been daily headlines for months and have showed no signs of slowing down. Epiq’s ACCER bankruptcy report lists 4,800 (as of August 2020) Chapter 11 bankruptcy filings, which is approximately a 28% increase in comparison to 2019.
We’ve organized a listed some of the biggest commercial bankruptcies from the past several months as the trend started to pick up. As the year continues, it will be evident to see which industries are being effected the most. With the economic-relief aid that was distributed in the early months of the pandemic is getting smaller and smaller, it is expected that September and October will see larger bankruptcy numbers, as businesses that have been relying on aid will receive their final blow.
While larger retailers are filing largely as a protective measure, for many chain and local restaurants it is too late. The restaurant industry tops Bloombergs report on those with the most bankruptcy filings, listed at #1 with a total of 530 filings as of June 29, 2020.
Popular children’s restaurant Chuck E Cheese is a part of that statistic. It filed on June 25th, citing store closures and stay-at-home orders falling, according to the Washington Post. NPC International, which operates both Wendy’s and Pizza Hut stores, filed in July. The Daily Mail predicts that more large chain restaurants like Cheesecake Factory, Denny’s and IHOP may be at risk for bankruptcy filing later in the year. They aren’t alone; according to a report from Yelp, 23,981 eating establishments across the United States have experienced some kind of closure, and 11,990 have closed for good. The restaurant industry is followed closely by construction (498 filings) and then real estate (480) in number of bankruptcies, with travel and tourism quickly rising.
With large amounts of bankruptcies being filed and more predicted to come, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to provide $2 trillion economic stimulus package to support us businesses impacted by coronavirus. It also includes revisions to certain provisions of the U.S. Bankruptcy code in an effort to provide better and more effective bankruptcy relief. This means that more small businesses will be able to qualify for a more affordable and streamlined bankrjuptcy process, historically Chapter 11 bankruptcy was not an option for struggling smaller businesses due to the length and unmanageable expense of the process. While many companies are jumping at the opportunity, it doesn’t completely solve the issue, especially as the impact of COVID-19 is predicted to linger in the marketplace until 2024.
Break glass in case of emergency
When most companies find themselves on the path to bankruptcy, they look for any way to avoid it. Consolidation within their own business is often the best option that does not only help avoid a court ordered repossession of assets or property, but an also be a unique opportunity to actually benefit the business.
While companies are going through the process of filing for bankruptcy, there are ways that a company can retain its value. Traditionally, corporate lawyers are used specifically to understand M&A opportunities, securities, banking, labor and employment, etc., in order to analyze the situation to determine if it is possible to avoid bankruptcy by trying to negotiate with creditors. They will also be looking to understand what assets a company has by analyzing previous agreements and contracts to see what is available to them, what can be retained, and what can be parted with. For example:
- Cash
- Temporary investments
- Accounts receivable
- Prepaid expenses
- Land
- Buildings
- Machines
- Long term investments
- Bonds
- Stocks
- Goodwill
By understanding what is available to them, these lawyers look through all this information and assets to determine if it is possible to come up with a repayment plan that satisfies the creditors. This can include:
- Consolidation of real estate property
- Corporate reorganizations (including mergers)
- Corporate buyouts
- Employee consolidation
- Divesting/selling branches
Here are some real-life examples of this playing out:
With debt piling and COVID-19 temporarily closing stores, J. Crew’s sales began a steep downward trend that resulted in them filing in May 2020. As part of the bankruptcy proceedings, J Crew’s lenders will convert about $1.65 billion of its debt into equity and secured $400 million from current leaders to stay open while they go through restructuring.
GNC has decided that as part of their bankruptcy plan, they will be permanently closing 800-1,200 stores nation wide, which is almost half of their total locations.
Hertz car rental filed on May 28th, and with the potential that their rental companies will be going under permanently, there may be cheaper cars available on the horizon, as Hertz tries to sell of some of the cars that it will no longer need in order to help with their debt.
Chuck E Cheese is waiting to see if they could be acquired to help them through their bankruptcy and to help alleviate some of their debt repayment.
United Airlines, in an attempt to avoid financial repercussions and preserve cash from COVID-19 including bankruptcy, may be furloughing 36,000 employees.
According to the New York Times, Chevron agreed to buy Noble Energy, oil giant, which was headed towards bankruptcy, for $5 billion, which might be the beginning of many more consolidations in the US oil industry due to COVID-19 repercussions. As well as gaining all assets, Chevron will be gaining many properties across the world for a much lower price.
Virgin Atlantic, a UK based airline company filed for bankruptcy on August 3rd, announcing a $1.5 billion restructuring plan to try and alleviate some of the pressure on the business, according to CNN. It will be one of the many businesses looking to understand what their options are and monitoring the virus closely to see how long it could take to get business back on track. In their case specifically, they will be closing one of their smaller ventures and cutting jobs at their sister company to start saving costs.
In order to be successful, completing an honest assessment of where the business stands will provide the best data to make a decision. If you’re interested in learning more about Heretik’s bankruptcy and restructuring capabilities, check out our use case demo package or click below to get in touch with our team.
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CLAIRE WILLIAMS
Claire is a Marketing Coordinator at Heretik. She recently graduated from Miami University Ohio with a double major in Journalism and Mandarin Chinese. Prior to Heretik, Claire worked at Amdur Productions and for Miami University College of Arts and Science.
