Chapter 11 Business Bankruptcies Rose 26% In First Half of 2020
About 3,600 businesses filed for chapter 11 protection, though bankruptcy-related job cuts fell from first six months of 2019. Chapter 11 Business Bankruptcies Rose 26% In First Half of 2020
Chapter 11 business bankruptcy filings increased 26% in the first half of this year as more companies sought protection from creditors during the coronavirus pandemic, according to legal-services firm Epiq Systems Inc.
U.S. courts recorded a total of 3,604 businesses filing for chapter 11 protection in the first six months of 2020, up from 2,855 in the first half of 2019, Epiq said based on data from its Aacer business unit. Commercial chapter 11 filings were up 43% last month from June of last year.
“In challenging economic environments, companies attempt to file at the right time to capture the best outcomes at the end of the lengthy process,” said Deirdre O’Connor, managing director for Epiq Corporate Restructuring.
There have been more than 500 chapter 11 filings under new bankruptcy rules in place since late February, designed to help small businesses move through the process more quickly and lower paperwork costs.
A bigger rise in bankruptcies is likely to be seen in the coming months as federal Paycheck Protection Program funds and other assistance programs run out for small and midsize businesses, said Rachael Smiley, a bankruptcy lawyer at Dallas-based law firm Ross & Smith PC.
“We may be on borrowed time for job cuts in a number of industries…that were not necessarily distressed when we entered the pandemic,” Ms. Smiley said.
A number of prominent companies filed for bankruptcy in the first half of 2020, including department-store chain J.C. Penney Co., hospital operator Quorum Health Corp., home-goods retailer Pier 1 Imports Inc., telecommunications company Frontier Communications Corp. and CEC Entertainment Inc., the parent company of Chuck E. Cheese.
Overall, for the first half of 2020, bankruptcy filings across all chapters totaled about 298,000, down 23% from a year earlier.
“The market is anticipating a wave of new filings related to the high unemployment rate,” said Chris Kruse, senior vice president at Epiq Aacer. “However, we expect to see overall filings continue to trend down until the government programs that inject liquidity into the economy for companies and individuals come to an end.”
Despite the rise in chapter 11 filings, job cuts announced due to bankruptcies in the first half of 2020 were down from the year-earlier six months.
“Job cuts do not immediately follow a bankruptcy filing, so it’s likely in the months ahead, the filings from the first half of the year will result in cuts,” said Andrew Challenger, senior vice president of global outplacement firm Challenger, Gray & Christmas Inc.
So far this year, U.S.-based employers have announced nearly 9,600 job cuts, according to Challenger, Gray & Christmas. That is significantly lower than the nearly 41,200 job cuts due to bankruptcies from January through June 2019.
This year’s bankruptcy-related job cuts were led by retail, the services sector and the entertainment and leisure industry. The majority of the bankruptcy-related layoffs for all of 2019 were in retail.
Last year was particularly severe for bankruptcy job losses. The number hit more than 62,000 in 2019, the highest level since 2005.
“How many job cuts result from bankruptcy depends on the type of companies filing for bankruptcy,” said Jonathan Carson, chief executive of Stretto, a bankruptcy and technology services firm. “Some companies that file chapter 11, with the intention of reorganizing their business, by and large can happen in a way that involves very few job cuts. But…a retailer that files bankruptcy and closes 150 locations can lead to a lot of job cuts.”
U.S. Retail Bankruptcies, Store Closures Hit Record In First Half
Through June, 18 retailers have filed for chapter 11, according to BDO USA, mostly those selling apparel, footwear and home furnishings.
Retail bankruptcies, liquidations and store closings in the U.S. reached records in the first half of 2020 as the Covid-19 pandemic accelerated industry changes, particularly the shift to online shopping, according to a report on the downturn’s severity.
This year’s collapse in American retail is on pace to rival 2010, when 48 retailers filed for bankruptcy in the wake of the 2007-09 recession, according to the report by professional-services firm BDO USA LLP. Including filings through mid-August, BDO said 29 retailers have sought bankruptcy protection in 2020, surpassing the 22 such filings recorded last year.
Temporary government-mandated store closures and social-distancing measures have intensified challenges that bricks-and-mortar retailers had faced before the pandemic, according to BDO. Consumers stuck at home are buying more online than ever, with rising internet sales expected to partially offset losses from physical stores, the report said.
That trend has put more pressure on bricks-and-mortar locations, compounded by excessive debt, store saturation, high unemployment and changing shopper behaviors. In particular, demand has cratered for business attire and outfits for social occasions—weddings, graduations and other milestones.
“This is almost certainly the worst year in recent history for retail,” said Kyle Sturgeon, a managing partner at Atlanta-based turnaround advisory firm Meru LLC.
This year is on pace to rival the 48 total bankruptcy filings by retailers in 2010, following the 2007-09 recession. Retail bankruptcies in 2020 have already surpassed the 22 total filings in 2019.
In the first six months, 18 retailers filed for chapter 11 protection, mostly concentrated in apparel and footwear, home furnishings, grocery and department stores, BDO said. They include department-store operators Neiman Marcus Group Ltd., J.C. Penney Co. and Stage Stores Inc., home-goods retailers Pier 1 Imports Inc. and Tuesday Morning Corp. and vitamin seller GNC Holdings Inc.
“The trend is still a lot of liquidations and asset sales, and some of them are still trying to reorganize and emerge,” said David Berliner, a partner in the firm’s business restructuring and turnaround services practice.
From July through mid-August, 11 more retailers filed, including apparel retailers Lucky Brand Dungarees LLC, Brooks Brothers Inc., Ann Taylor parent Ascena Retail Group Inc., Stein Mart Inc. and Tailored Brands Inc., the parent of Men’s Wearhouse and Jos. A. Bank.
“I don’t think it’s going to stop anytime soon,” said Andy Graiser, co-president of commercial real-estate advisory firm A&G Real Estate Partners, who advises Tailored Brands, Ascena, Neiman Marcus and Stein Mart, among others.
Before the pandemic, department-store chains such as Lord & Taylor, J.C. Penney and Neiman Marcus were already struggling as shoppers bought more online, defected to startups and shifted their preferences to small specialty stores.
Men’s Wearhouse and Jos. A. Bank parent Tailored Brands, which filed for bankruptcy in August, partly blamed its struggles on missteps such as underinvesting in casual clothes and e-commerce. J.Crew also signaled that it was unable to overcome the shifts to fast fashion and online shopping.
Discount home-goods retailer Tuesday Morning, which filed for bankruptcy in May, was hurt by its lack of e-commerce presence as more shopping shifted online.
Upscale retailer Neiman Marcus filed for chapter 11 in May. “We had a business that was on track prior to Covid-19,” Chief Executive Geoffroy van Raemdonck said at the time. “Everything was going well in our transformation, but we had massive interest payments. Covid threw everything off track. This is an opportunity to reset our financial structure.”
High rates of bricks-and-mortar store closures are expected to continue, BDO said. From January through mid-August, retailers had announced they would close more than 10,000 stores in the U.S., including locations of solvent companies such as Macy’s Inc., Bed Bath & Beyond Inc. and Gap Inc.
That has already topped last year’s record 9,500 store closures. Many of the closings through mid-August 2020 were due to retail bankruptcies, which accounted for nearly 6,000 closures.
Retailers have said so far this year that they plan to close over 130 million square feet of store space in the U.S. Of that total, more than half belongs to five retailers: Penney, Macy’s, Stein Mart, Bed Bath & Beyond and Pier 1 Imports, according to real-estate data firm CoStar Group Inc.
Retailers are likely to decide to close as many as 25,000 U.S. stores in 2020, according to global market-research firm Coresight Research.
Many of the stores going dark are anchors and other tenants in shopping malls. Real-estate research firm Green Street Advisors LLC has forecast that more than half of all mall-based department stores in the U.S. will close by the end of 2021.
Landlords including mall owners Simon Property Group Inc. and Brookfield Property Partners LP have been stepping up, buying troubled tenants like J.C. Penney out of chapter 11, their third acquisition in four years of a bankrupt tenant.
More retailers are expected to seek bankruptcy protection in the second half of the year, though the pace could slow in the fourth quarter as some hold off until early next year in hopes of a profitable holiday season.
“If the holidays don’t go as planned, there’s going to be some real cash flow and income hits to these retailers,” said Mr. Berliner, who has advised on the bankruptcies of Tuesday Morning and Lord & Taylor. “For some of these, still distressed retailers with a lot of debt, may be their last straw.”
Some companies that have waited too long to file for bankruptcy might simply liquidate if they keep burning cash and don’t have enough money to fund a restructuring through the courts.
“That’s not the norm and I think we’re gonna see a lot more of those,” said Mr. Graiser, pointing to Stein Mart and off-price retailer Century 21 Department Stores LLC, which filed for bankruptcy in August and September, respectively, and are liquidating their assets.
Shaky companies that make it through the holiday season might survive only to encounter landlords that had agreed to rent deferrals but now want payment in full. The added pressure might force more retailers to close stores and file for bankruptcy, Mr. Graiser said.
“That’s a huge bubble that is going to burst for a lot of retailers with the inability to pay that back,” he added.