BOSTON, Mass. (December 24, 2019) – As we write, US stock markets have just closed for the shortened Christmas Eve session. A banner year is coming to an end for the three major indices. Posterity may well look back on this departing decade with fond nostalgia.
The overall trend in bankruptcy filings fits the narrative
of boom times in America. This years’
corporate bankruptcies, at a year to date total of 9,901, are well below the
peak of 2009, when BankruptcyData recorded 22,889 filings. Similarly, personal filings have been
trending down for a full 10 years and are at historical lows.
Cheap money begets rising debt and there’re are no dearth of charts showing an upward slope in credit obligations over the same period. But neither the impressive performance of the equity markets cannot mask a recent uptick in business bankruptcy activity, whose low point was 2017.
BankruptcyData pays close attention to Public Company filings because we think these are a proxy for the general economy. These are, in theory, the businesses with the most access to credit and financing, so any signals that they are seeking bankruptcy protection from creditors in increasing numbers may presage a change in economic conditions.
The bankruptcy action kicked off in 2019 with a bang. PG&E filed for protection under Chapter 11 of the federal bankruptcy code in the Northern District of California on January 29th, becoming in the
process a bankruptcy court repeat offender. This was the company’s second visit
to bankruptcy court, earning this filing moniker of a Chapter 22. (Two times Chapter 11 equals Chapter 22 in
the mathematics and argot of the restructuring industry.)
The filing was notable as it ranked as the 6th largest in history (as measured by pre-petition asset size…for full listing see BankruptcyData.com). At stake are $71.4 billion in pre-petition assets, as listed in PG&E’s filing petition.
PG&E’s first trip to bankruptcy court back in 2001, with
$36 Billion in pre-petition assets, was already in the top 20 of all time. (That 2001 filing now ranks as the 13th largest.)
This latest PG&E filing is the first we have added to the list of largest bankruptcies of all time since 2014, when Energy
Future Holdings, another electric utility company, found itself
under bankruptcy protection with just under $41 billion in assets.
But does one swallow a summer
make? There are reasons to think it
might. Through December 24 there were 63
bankruptcy filings by publicly traded companies compared to 58 filings a year
ago. Of more significance still is the
amount of assets going into bankruptcy in 2019. At an aggregate of 150 billion,
this is the highest number since 2009.
So, apart from California’s largest utility, where was the action in 2019?
Headlines focused on the “retail apocalypse”, just as they did in 2018. On the face of it, however, at least for public market impact, the activity was relatively minor. Only 4 retail industry filings corresponded to publicly traded entities. Companies like Fred’s and FTD are old companies and may resonate with many, but the private sector restaurants and retail names like Forever
New York and Perkins
& Marie Callender's, LLC were
the names that carried more mainstream ‘oomph.’
The impact on markets however is not from the removal of a handful of equity listings. Follow on effects will materialize, for example, in the holdings of REITS (i.e., lease rejections via the bankruptcy process from high rent, high square foot tenants will be hard to compensate for). Direct lenders, whose exposures as creditors are likely underreported, may similarly feel uncomfortable heat in 2020.
Other sectors with significant bankruptcy activity included chemicals (nine public filings), telecommunications (five), healthcare and transportation (four each). It is also worth noting that the five largest filers (see table) came from five different industries (utilities, mortgage finance, telecommunications, oilfield services and travel).
Some notable chemical companies may have some post-bankruptcy value to investors. One such company is Hexion
Holdings which is one of the larger 2019 filers. Hexion emerged
in July and is now trading under ticker HXOH.
Aegerion Pharmaceuticals, Inc., is another filer of note. This company was acquired by Amryt Pharma Plc (Amryt Pharma is quoted on the London Stock Exchange’s AIM Market and the Irish Stock Exchange’s Euronext Market) and may have added value to Amryts suite of products.
Also, interesting to note both Insys Therapeutics, Inc., (publicly traded) and Purdue Pharma (private) filed bankruptcy in 2019 which may set off a movement of opioid related bankruptcy and litigation. We have seen Mallinckrodt's name show up quite a bit on our distress radar.
Telecom faces pressure as we continue into 2020. 2019 saw names like Windstream Holdings, Inc. finding protection under the bankruptcy code. Other telecoms of mention include Fusion Connect, Inc. when faced a liquidity crunch when the Birch merger failed and Maxcom USA, which
found its way back to court protection for the 2nd time in 6 years.
The healthcare space saw a rise in senior care center, nursing and rehab type facilities. Much of the action is in the private sector and includes names like: Astria
Senior Living Center (Mirador) and Tarrant
County Senior Living Center, Inc. The bulk of the creditors in these filings are senior citizens, a vulnerable population segment.
Anecdotally, transportation woes have signaled down economic cycles in years past. Celadon
England Motor Freight and Jack
Cooper Ventures are some of the larger, notable transportation filings in 2019, which could be harbingers of a rocky road to come. Per Celadon Group’s first day pleadings:
“In mid-2019, the trucking freight
market began to soften. The combination of a decline in overall freight tonnage
and excessive truck capacity in the market led to a significant decline in
freight rates, and customers began to take bids at lower freight rates.
Compared to the year immediately prior, 2019 showed a steady decline in
freight rates, including spot freight rates and contractual rates. In addition to declining freight rates, volumes of loads in freight have experienced decreasing numbers for a significant portion of 2019.”
The recent announcement from Mack Truck about planned layoffs and significant build decreases supports the theory. ACT
Research Vice President Steve Tam said “the Columbus, Ind., firm is projecting U.S. heavy-duty truck production to end this year at about 287,000, which includes around 211,000 highway trucks and 76,000 vocational trucks (a segment that includes construction and garbage trucks, in which Mack is particularly strong). For 2020, ACT Research expects truck production to drop to 180,000, which includes a projected 121,000 highway trucks and 59,000 vocational trucks.”
Continuing with the theme of mobility, we expect continued pressure on the automotive sectors coming into 2020. Highly leveraged parts manufacturers in both the original equipment and high-performance segments will be feeling the heat in the months to come. Names we have been covering are: Accuride (potential Ch. 22), APC
Automotive Technologies, Camping
World and Cooper-Standard (potential Ch. 22) just to name a few.
Our research shows trends in the distress sector include a significant risk in chemicals, healthcare, mining, oil & gas, telecom and continued stress in retail. The distress tracking system found on BankruptcyData has flagged many of the latest bankruptcy filings well before they filed: Anna
Ridge Brands and Dean
Foods are recent examples.
In addition to flagging downgrades, low ratings, defaults and other signals we also follow and track the engagements of professional firms in the restructuring industry. We do this for companies both outside and inside the bankruptcy court system. For companies that file bankruptcy, we track, and rank professionals based on filing motions with the court. The criteria for rankings include: all public companies regardless of asset size and private companies with $50mm or more in pre-petition assets.
George Putnam, III founder of BankruptcyData and New Generation Research, Inc. notes, “We have previously taken note of the huge amount of lower quality debt, both high yield bonds and so-called “leveraged loans” (a euphemism for lower quality bank debt), that has been raised in recent years. A significant portion of that debt matures over the next few years. Some fraction of that debt will not be capable of being refinanced and will end up in bankruptcy or some other form of restructuring.
If the debt markets and the economy both remain strong, the
percentage of outstanding debt that requires restructuring will remain small,
but because of the huge amount of debt out there, the actual quantity of debt
to be restructured will still be very substantial. If the debt markets weaken – and the current
period of favorable conditions in the debt markets is unprecedented in terms of
longevity – the number of restructurings and bankruptcies could soar. Any weakness in the U.S. economy would only
magnify the effect.
While it is always difficult to predict the future, we strongly suspect that the increase in public bankruptcies that we’ve seen in 2019 is the beginning of a multi-year trend. How sharp the increase will be in 2020 and beyond will depend on the conditions in the debt markets and the economy as a whole.”
2019 Bankruptcy and Restructuring Industry
Best Awards Update
We release our league tables annually in our Bankruptcy
Yearbook and Almanac which comes out early spring and announce the winners at the ABI Annual Spring Meeting Lunch. All this data is real time on the BankruptcyData user interface.
The preliminary finalists as the year ends:
Kirkland & Ellis LLP, Weil, Gotshal & Manges LLP, Pachulski Stang Ziehl & Jones LLP, Young Conaway Stargatt & Taylor, LLP, Lowenstein Sandler PC, Bayard, P.A. and Akin Gump Strauss Hauer & Feld LLP.
For Financial Advisor:
AlixPartners LLP, Alvarez &
Marsal, LLC, Conway MacKenzie, Inc., Dundon Advisers LLC, FTI Consulting, Inc.,
GlassRatner Advisory & Capital Group LLC and Province, Inc.
For Investment Banker:
Centerview Partners LLC, Evercore
Partners Inc., Gordian Group, LLC, Guggenheim Partners LLC, Houlihan Lokey,
Jefferies & Co., Lazard Ltd, Miller Buckfire & Co., LLC, Perella
Weinberg Partners, PJT Partners Inc., Seaport Global Securities LLC and SSG Capital Advisors LP.
For Claims Agent:
Donlin Recano & Co., Inc., Epiq
Systems, Inc., Kurtzman Carson Consultants LLC, Omni Management Group, LLC,
Prime Clerk and Stretto.
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