*** UPDATE ***
(See prior article on this blog – “Chapters in Bankruptcy, a Short Primer…”)
The number of Chapter 11 (“reorganization” bankruptcy) filings has reached an all-time high since 2011. In that year, there were 789 Chapter 11 filings as the nation was still trying to recover from the “great recession” of 2008 – 2009.
According to data from the American Bankruptcy Institute (“ABI”), the year-over-jump (that tracks the number of such filings in comparison to previous reporting periods) was the second highest to be recorded in any month since that recession. The December, 2017, year-over-jump was 366 filings – the year-over-jump for March of this year was 299.
Chapter 11 bankruptcy is used primarily by companies to restructure its debt in bankruptcy court under the supervision of a bankruptcy Judge. Under this process, a company attempts to restructure its debt to allow it to satisfy a portion of the total for all creditors while, at the same time transferring all or part of its ownership from pre-bankruptcy owners to new creditor-owners.
Secured creditors in a Chapter 11 case almost always come out ahead of non-secured creditors. Shareholders of the to-be-reorganized company and unsecured creditors usually wind up losing their total investments / owed debt, while secured creditors more-than-likely come out whole. The primary premise of Chapter 11 bankruptcy proceedings is for troubled companies to “shed” some overburdening debt and emerge from bankruptcy as a healthier, viable entity that has a “renewed” future.
Historically, Chapter 11 filings “peak” in conjunction with the tax season in April. The low pointsusually occur toward the end of the year in December. In March of this year new Chapter 11 filings in the nation rose sixty-three percent (63%) year-over-year since March, 2017. That was the greatest number of filings since April, 2011. Many of the recent filings (2017 through the current period) have been traditional “brick-and-mortar” operations and some of the country’s most iconic retailers. The retail sector of the economy has been particularly hard hit in the past several years.
Amongst the companies that filed for Chapter 11 protection in 2017 are:
- Toys ‘R Us (initially filed in September, 2017 with debt in excess of $4 billion. After a struggle to find a “financial angel”, the iconic retailer finally called it quits earlier this month and will liquidate and go out of business)
- Gymboree (filed in June, 2017, with the hope that reorganization would lower its existing debt by some $900 million, down from nearly $2 billion. The plan called for the closure of 370 stores all but wiping out its second-place standing (behind Toys ‘R Us) in the toy retail sector)
- Rue21 (the teen clothing retailer, with $1 billion in assets and nearly $10 billion in debt filed in May, 2017. Rue21 exited bankruptcy in September, 2017, with its future existence and viability still in substantial doubt)
- The Limited (shuttered all of its 250 ahead of filing for Chapter 11 protection in January, 2017. In the end, its remaining value (consisting of not much more than its intellectual property made up of trademarks, website and social media accounts) was bought up by private equity firm Sycamore Partners(Sycamore’s portfolio also includes Nine West, Coldwater Creek and the Belk department store chain)
- Vanity (sought bankruptcy protection in early March, 2017. It has closed all of its 140 retail locations with a vow posted on its website – “We will be back soon”. NOTE: its nowhere to be seen in retail, yet, a year later)
- RadioShack (filed in March, 2017, after previously filing for Chapter 11 protection in 2015, and partnering with Sprint and exiting bankruptcy later that year. The current filing called for the closing 200 of its 1,200 domestic locations)
The foregoing filings were the “big name” filings in2017. Two of those noted – Toys ‘R Us and Gymboree – were the worlds’ two largest toy retailers at the time, and both were controlled by Bain Capital, Inc., the private equity firm that was once owned solely by former Massachusetts Governor and failed 2012 GOP presidential nominee Mitt Romney.
Other 2017 Chapter 11 filers included: Wet Seal (February), Eastern Outfitters), BCBG Max Azria (February), Hhgregg (March), Gordmans (March), Gander Mountain (March), Payless ShoeSource (April), Cornerstone Apparel (Papaya Clothing) (June), True Religion Apparel (July), Alfred Angelo (July), Perfumania (August), Vitamin World (September) and Aerosoles (October).
If 2017, was a bad year for the retail industry, the current year is shaping up to be even worse. Some analysts say that the “era of big box, brick-and-mortar retailers is coming to an end with changing demographics, the advent of online shopping, and the ascendance of a few major enterprises such as Amazon, Target and Wal-Mart.” An article posted yesterday on the zerohedge.com website stated:
“The by now well-documented Brick-and-Mortar retail meltdown isresponsible
for part of it (i.e. the spike in Chapter 11 filings). Retailer bankruptcies of all
sizes have been piling up in large numbers since 2016. They all started out as
Chapter 11 filings, though many of them later turn into messy liquidations, like
There is a “downside” to every Chapter 11 bankruptcy proceeding. In 2018, that downside has a new and more chilling impact on companies taking the bankruptcy route after Congress passed and Trump signed the recent “tax reform” legislation. The zerohedge.com article addressed that situation as follows:
“Creditors and shareholders of failing companies knew that they could write off
losses in 2017 under the old corporate tax rate of 35%, thus getting the
government to pick up 35% of the tab of their losses via lower taxes. In 2018,
the new tax law adds uncertainties, but shareholders and creditors knew that
losses incurred in 2018 would face the new corporate tax rate of 21%. And so
the government would only pick up 21% of their losses…”
The article concludes:
“But in March (of this year), this logic no longer applies. So, it looks like the
December spike was a mix of tax consideration and a sharply deteriorating
credit environment for companies… This is a sign that the economy has
arrived at the end of the “credit cycle”. The Fed is trying to push up
interest rates and tighten financial conditions. Weak companies are starting
to have a harder time refinancing their debts. And those that succeed face
higher borrowing costs. Some sectors are getting hit harder than others,
such as brick-and-mortar retail… But this is now spreading in other sectors,
such as specialized subprime auto lenders…”
In recent years, specialized subprime auto lenders have been targeted by private equity firms such as KK&R, Bain Capital and others. But, subprime auto delinquencies, according to recent reports, have climbed to their highest rate since late 1996. Three of the leaders in this field have recently filed for Chapter 11 bankruptcy protection and other have liquidate. As one pundit put it, “…subprime auto lending as an industry may be on the verge of collapsing” – this, while allegations of fraud, misrepresentation and other dirty-dealing have been noted in several bankruptcy filings.
And, so it goes… There is a big, looming question afoot: are we seeing the beginnings of a cultural shift of great magnitude where once iconic brands are being wiped out to be replaced by the “new” way of shopping – the rise of Amazon and its ilk in favor of Toys ‘R Us and other brick-and-mortar operations of (the not-so-recent) past?
Image credit: succo