The coronavirus pandemic is about to bring on a wave of bankruptcies in 2020. Big apparel brands and department stores like J.Crew, Brooks Brothers, Neiman Marcus, and JCPenney – all filed for bankruptcy to reorganize their businesses.
But it’s not just the retail sector that’s suffering. Bankruptcies now ripple through almost every industry: automotive, aviation, telecom, oil and gas companies in the U.S. are also feeling the pain as demand dries up during the COVID-19 pandemic.
Car rental company Hertz declared bankruptcy, oil driller Chisholm, fracking pioneer Chesapeake Energy, and your favorite childhood restaurant Chuck E Cheese also went under.
And economists say this is only the tip of the iceberg. Despite billions of dollars spent in government support and loans, it might be too late for a lot of these companies. Experts say we’re on track to mirror the number of commercial bankruptcies seen during the Great Recession.
Legal scholars worry that bankruptcy courts will soon be overloaded, resulting in delays as many cash-strapped business owners will be forced to shut down permanently.
So, what do all these bankruptcies mean for the economy going forward, and how do big brands bounce back successfully after they’ve filed for bankruptcy?
Bankruptcy in pockets is generally very good for the economy because borrowers are getting rid of their debt, which means that they are able to then go out and invest and engage in economic activities once they reorganize.
But with the current unemployment rate hovering around 10%, bankruptcies during these times can hurt the economy. So far, there have been 3 604 commercial Chapter 11 bankruptcies in the first half of 2020 from January 2020 to the end of June 2020.
That’s a 26% increase from the same period last year. Total commercial Chapter 11 filings in July 2020 increased 52% from the previous year. Restaurants also surpassed the number of total closures in retail due to the COVID-19 pandemic.
As of July 10th, there have been over 26 160 total restaurant closures, an increase of 2179 since June 15th. That’s according to data from Yelp. About 60% are permanently closed, with bars being especially hit hard. The retail industry also endured 26 119 total business closures, of which 48% were permanent.
Beauty and spas bars and nightlife and fitness centers are also suffering the blow, and while the total number of bankruptcy filings has been down because of the swift government action, the number of commercial filings has actually been increasing every month since March.
If you look at the numbers of total filings in 2009 and 2010, we were at 1.4 1.5 million total filings, and as far as Chapter 11 filings in 2009, we had 15 000 Chapter 11 filings. So we are going to see an increase that matches or comes close to matching those numbers.
And it’s not just the retail industry that’s struggling when the country shut down because of COVID-19 – almost every industry was affected: travel, hospitality, energy, restaurants, gyms, commercial, real estate companies are all filing for bankruptcy. Oil and gas and healthcare sectors have also suffered in the pandemic.
People aren’t commuting as many hospitals are running out of cash because of tight margins, fewer patients, and fewer elective surgeries. Hospitals are very difficult to run, and a lot of them that were having problems now with COVID. This was also exacerbated when all of a sudden, all the elective surgery disappeared. In fact, COVID treatment is very expensive once you get into an ICU.
Oil and gas are more troubling for the economy because these are workers who earn a lot of money, and they are in places where that money makes a big difference to the local economy.
Companies’ scope bankrupt all the time, and filing for bankruptcy doesn’t always mean it’s the end for big-name brands. Big companies generally file for what’s known as Chapter 11 bankruptcy, which is used to reorganize a business or corporation.
Businesses come up with a plan on how they’ll continue operating while paying off their debt, and both the court and creditors must approve of this plan. The process begins by filing a petition with the bankruptcy court serving the area where the debtor has residents, a written disclosure statement that has information about assets, liabilities, business affairs of the debtor, and a reorganization plan filed with the court.
The trustee monitors the whole process to make sure debts are restructured properly while the business operates normally. It can take years for a business to actually pay off its debts, which can be done through future earnings.
The most common type of bankruptcy for individuals is Chapter 7 bankruptcy. The main goal is to quickly get rid of debt by selling off assets in order to pay back creditors. A court-appointed trustee oversees the sale of assets to pay off creditors, and any remaining unsecured debt is typically erased.
There’s also another type of bankruptcy called Chapter 13 bankruptcy, which allows individuals to restructure their debts the same way a company can under Chapter 11.
The court approves a monthly payment plan that allows individuals to pay back a portion of their unsecured debt and all of their secured debt over a period of three to five years.
Delta Airlines filed for bankruptcy in 2005. After a year and a half of restructuring, the airline exited bankruptcy in 2007 after cutting 6 000 jobs and reducing labor costs by 1 billion dollars.
American Airlines also filed for bankruptcy in 2011, and after years of restructuring and merging with U.S. Airways, the company became profitable again in 2014.
General Motors filed for bankruptcy at the height of the great recession but with 50 billion dollars in government bailouts, survived bankruptcy and continues to be profitable today.
The two most common types of bankruptcy are Chapter 11 and Chapter 7. Most people think about a Chapter 7 bankruptcy, they think about that company, for the most part selling office assets and starting the process of winding the company’s operations down. In other words, that’s typically a going out of a business type of bankruptcy process. With respect to Chapter 11 that is typically known as a reorganization process.
Big companies and retailers almost always file Chapter 11 bankruptcy because it buys them time to reorganize their business and make it profitable again. The business can also continue operating normally during the bankruptcy process, but going through a bankruptcy is often complicated, messy, and time-consuming. Filing for Chapter 11 bankruptcy is also very expensive.
Bankruptcy lawyers involved in those kinds of cases charge clients anywhere from thousands of dollars per hour for their services. The Goldman Sachs survey showed that more than eighty percent of small business owners who receive some form of government relief would run out of funds by early August. Only 37% said they could survive another shutdown if a second COVID-19 wave comes.
Economists also projected more than a hundred thousand small businesses have shut down permanently since the beginning of the pandemic in March. Small businesses typically do not enjoy the access to capital that larger businesses enjoy. They don’t have the margins that larger businesses enjoy.
One option for small businesses is to pursue the small business reorganization act, which allows small businesses to survive bankruptcy without the high costs and complexities associated with typical Chapter 11 bankruptcies.
Nearly 500 small businesses elected to file for bankruptcy relief under this act since it was enacted in February of 2020. But for many mom and pop shops, the best option may be to shut down the business.
There have been at least 140 000 total business closures from March 1st to June 15th. According to Yelp’s economic report, the percentage of permanent to temporary business closures is also rising as permanent closures make up 55% of all closed businesses since March 1st, a 14 increase from June.
The total consumer and commercial bankruptcy filings have been lower than previous years, but we expect those numbers will start picking up from now until the end of the year, especially with the delays of the second stimulus bill.
Some of the stimulus package from the Cares Act has expired, and that gap not knowing whether there’ll be another one coming or what that will look like will be devastating to some companies because they’re holding on.
There’s a really strong relationship between bankruptcy filings and the unemployment rate, and our unemployment rate today is far higher. It has been over the past like three or four months far higher than it ever got in the 2008 to 2010 financial crisis.
The shock of the pandemic will carry on to affect more businesses in the near future, and the v-shaped economic recovery everyone’s talking about it may be too late. If you look at history, we’ve had a significant recovery since the great recession and but it took three years to get moving, and so we would fully expect if we continue on this path we’re going that it will be several years for us to recover.
All of the data and all of the research that has been done suggests that there’s a lot of frictions in restructuring and that there will be some businesses that are very v-shaped, but we think there will be some businesses that that will take a very long time to get back to normal and then my opinion, therefore, it’s too optimistic to say we’re going to have a v-shaped recovery.