May 18, 2020

Reorg First Day Bankruptcy Data Analytics Reveal 21% Jump in 2019 Chapter 11 Cases From Prior Year; Energy and Healthcare Sectors Most Impacted

Jessica Steinhagen, Ian Howland

As 2019 has come to a close, with Q1 2020 on its way, a look back at 2019’s chapter 11 bankruptcy landscape provides an opportunity to look at the intersection of the law and technology, and in particular the use of data. The data compiled by the First Day team at Reorg reveals a busy year for companies seeking federal bankruptcy protection.

Relative to 2018, 2019 saw a 21% increase in filings, with 400 companies with liabilities exceeding $10 million seeking bankruptcy protection under chapter 11 -- a pace of about 1.1 new cases per day, eclipsing the frequency for at least the past four years.

The increase in filings from the prior year is largely due to distress in the healthcare and energy sectors. A picture of the changes in chapter 11 filing frequency by sector from 2018 to 2019 is below:

Changes in Chapter 11 Filing Frequency: 2019-2019

Changes in Chapter 11 Filing Frequency: 2019-2019

Certain other companies pointed to government regulations for their financial troubles, including the tariffs enacted under the Donald J. Trump administration. Chapter 11 filings have also continued to plague retail chains - though 2019’s filers in this arena constituted smaller chains with respect to debt than in 2018 and 2017 - and more than 10 restaurant chains filed. There was also a spike in the consumer staples sector, with an emphasis on cow’s milk and beef distributors.

Healthcare

After a record-setting 2018 that included a 57% year-over-year increase in healthcare filings from 2017, 2019’s healthcare filing count surged ahead of 2018’s by 34%. Since June 2015, the healthcare sector has accounted for roughly $26 billion in aggregate chapter 11 liabilities. By comparison, the oil and gas industry has accumulated approximately $145 billion in chapter 11 liabilities over this period, and aggregate retail chain chapter 11 debt is roughly $48 billion.

Aggregate Chapter 11 Liabilities - Healthcare: June 2018-2019

Aggregate Chapter 11 Liabilities - Healthcare: June 2018-2019

From the start of 2019, facility operators have been the largest share of healthcare filings, followed by pharmaceuticals and biotechnology companies, with suppliers and support services companies accounting for the lowest share. Healthcare facilities make up approximately 60% of 2019’s healthcare filings - with 62% of these hospitals being skilled nursing and long-term care facilities and the rest either general acute care hospitals or other medical practices and treatment centers.

2019 Healthcare Chapter 11 Filings by Sub-Industry

2019 Healthcare Chapter 11 Filings by Sub-Industry

The biotechnology and pharmaceuticals space had a big year, as these companies had more chapter 11 filings in the first six months of 2019 than in all of 2016, 2017 and 2018 combined. The bulk of this year’s pharma filers pinned their suboptimal financial position on difficulties in successfully commercializing their drugs or litigation. Between 2016 and 2018, there were nine chapter 11 cases in the pharmaceutical and biotechnology space, representing only 40% of the number of these cases that filed in 2019 alone:

Pharmaceuticals & Biotechnology Chapter 11s: 2016-2019

Pharmaceuticals & Biotechnology Chapter 11s: 2016-2019

Below is a description of each of 2019’s pharma and biotech chapter 11s:

Pharmaceutical and Biotechnology Chapter 11s: 2019

Pharmaceutical and Biotechnology Chapter 11s: 2019

The continuing care retirement communities, numbering 16 bankruptcies for the year, have been plagued by low occupancy and competition producing a surplus relative to need. This surplus has been especially acute in Texas.

Hospital Operator Chapter 11s: 2016-2019

Hospital Operator Chapter 11s: 2016-2019

Energy

Energy chapter 11s are up significantly in frequency from their 2017 and 2018 numbers, however, they still remain well below pace in 2016, which had filings stemming from the bottoming out of oil and gas prices in 2014.

Since June 2015, the oil and gas industry has accumulated over $140 million in aggregate chapter 11 liabilities, of which $45 million filed between March 1 and July 31 of 2016:

Aggregate Chapter 11 Liabilities - Oil & Gas: June 2015-2019

Aggregate Chapter 11 Liabilities - Oil & Gas: June 2015-2019

There has been an uptick in coal chapter 11s in 2019 - notching seven cases, as compared with 11 cases in all of 2016, 2017 and 2018 combined. Since 2016, coal bankruptcies have been split between metallurgical, thermal and mixed at the respective percentages of 37%, 25% and 38%. Coal industry filings have picked up since the second half of 2018; however, despite the rise in filing frequency, the average debt volume of these companies has remained lower in this period than it was in the first half of 2016, as shown below:

Coal Producer Chapter 11s and Reported Liabilities: 2016-2019

Coal Producer Chapter 11s and Reported Liabilities: 2016-2019

Retail

Since 2016, retail chains have accumulated approximately $47 billion in aggregate chapter 11 liabilities, as shown below:

Aggregate Retail Chain Chapter 11 Liabilities: June 2015-2019

Aggregate Retail Chain Chapter 11 Liabilities: June 2015-2019

Retail chains largely pointed to the usual complaints of a challenging retail environment, with less foot traffic at malls and more online shopping. Across the broader retail industry, including direct retailers, retail distributors and wholesalers and companies that provide support services directly to retailers, 63% of 2019’s chapter 11 filings in this area were stores, while 32% were distributors and 5% were support services providers:

2019 Retail Chapter 11s by Business Type

2019 Retail Chapter 11s by Business Type

Of the retail stores that filed chapter 11 in 2019, approximately 87% generated most of their revenue from brick-and-mortar sales. Like in the last three years, fashion and apparel stores make up the majority of retail chapter 11s, accounting for close to 50% in 2019. The year saw a large increase in filings by retailers and retail distributors of novelty, hobby, personal and gift items, which made up more than a quarter of 2019’s retail filers, as shown below:

2019 Retail Chapter 11s by Product Categories

2019 Retail Chapter 11s by Product Categories

There were numerous retail filings by companies identifying as upscale, luxury, high-end or premium, which have increased in both frequency and share of all retail chain filings since 2016. Falling into this category in 2019 are Diesel USA, Z Gallerie, L.K. Bennett USA, Barneys New York, luxury watch distributor New Dover and upscale candy retail chains Lolli & Pops and Sugarfina.

There were several retail industry “chapter 22s” in 2019, or second chapter 11 filings by the same company, including A’GACI filing its second case just one year and seven months after its first case, Gymboree and Payless repeating their second-quarter 2017 filings in the first quarter of 2018 and Charming Charlie repeating its December 2017 filing in July. In addition, Barneys’ August filing came 23 years after its 1996 bankruptcy.

Restaurants

There were 13 chapter 11 cases filed in 2019 by owners, operators, franchisors and franchisees of more than 760 restaurant locations in the aggregate, as summarized below:

Restaurant Chapter 11s: 2019

Restaurant Chapter 11s: 2019

Consumer Staples

Household names for consumer staples canned tuna and cow’s milk highlighted the year’s consumer staples cases with filings by Bumble Bee (felled by price-fixing investigations and class-action lawsuits) and dairy products distributor Dean Foods (facing falling demand for cow’s milk). Similar to competitor Dean, Borden (which filed shortly after the start of 2020) said that “[w]hile milk remains a household item in the United States, people are simply drinking less of it,” with increased competition from nondairy nutritional products and beverages for consumer sales, such as oat, nut, soy, hemp and other alternative milk products.

Broken down by food type, about 40% of food distribution chapter 11s were filed by companies focused on dairy and meat (mostly beef):

Food Chapter 11s by Food Type

Food Chapter 11s by Food Type

The trucking transportation space also took a hit in 2019. Out of more than 180 truck transportation company chapter 11 filings since January 2017, more than 80 of these companies filed in 2019.

Court Districts

For the third consecutive year, the percentage of chapter 11s filed outside of the top three court districts (Delaware, Southern District of New York and Southern District of Texas) has decreased slightly, from 66% in 2017 to 62% in 2019:

Share of Chapter 11 Cases by Filing District: 2016-2019

Share of Chapter 11 Cases by Filing District: 2016-2019

Sales

Of the companies seeking sales in a bankruptcy court proceeding in 2019, about a quarter were from the consumer discretionary industry, followed by 20% by healthcare companies, 15% from energy companies and 11% by consumer staples companies. The healthcare debtors pursuing sale processes included all but one of the pharmaceutical companies, and 63% of the nursing homes/retirement communities.

Debtor-in-Possession (DIP) Financings

Approximately 40% of 2019’s chapter 11 filers submitted requests for debtor-in-possession financing as part of their bankruptcy briefings, with the consumer discretionary, energy and healthcare sectors representing over 60% of those financing requests.