More Bankrupted Companies Opted For Reorganization, Not Liquidation, in 2020
Experts predict fewer bankruptcies on the whole this year, though retail reorganizations are likely to continue.
Reorganization is now increasingly favored over liquidation, according to an analysis of COVID-era corporate bankruptcy filings by S&P Global Market Intelligence.
Almost 62% of corporate bankruptcy filings last year sought to reorganize or restructure, the highest watermark since 2010, according to S&P data—and 2021 filings are set to outpace last year’s numbers. Conversely, in 2018 and 2019, liquidations were more commonly sought in bankruptcy filings.
Chapter 11 proceedings allow companies to file restructuring plans, while Chapter 7 filings liquidate the company’s assets. Bigger companies tend to choose Chapter 11, particularly if they enjoy strong brands recognition and operation in niche markets Diane Shand, a senior director at S&P Global Ratings, told S&P Global in an interview. And that process was particularly attractive to many more established brands last year, as the pandemic created uncertainty in global markets.
A total of 630 companies declared bankruptcy during in 2020, including well-known retailers like Neiman Marcus Group Inc., J. C. Penney Co. Inc., Ascena Retail Group Inc., and Tailored Brands Inc., and energy companies Fieldwood Energy Inc. and Chesapeake Energy Corp. But most of those reorganized not because their business model was unsound, experts told S&P, but because they were left with few options when economic shutdowns began rolling in (and persisted).
A prime example, according to S&P, is Hertz Global Holdings, which had little other options but to file Chapter 11 to navigate the challenging first half of 2020, when rental car sales ground to a halt. Also adding to the fray: prepackaged or prearranged bankruptcies, in which financial stakeholders agreed to reinvest in struggling companies post-pandemic.
Ultimately, the pace of Chapter 11 filings slowed at year’s end, and experts predict fewer bankruptcies on the whole this year, though retail reorganizations are likely to continue.
“There will be continued retail bankruptcies and store closures in 2021,” Alex Zikakis, president and founder of Capstone Advisors, told GlobeSt.com in an earlier interview. “Many of the bankruptcies and store closures will be in the categories that were already in decline, such as department stores and apparel, but will also temporarily affect service and entertainment categories such as sit-down restaurants, fitness, and group entertainment venues.”