Record-Shattering Chapter 11 Bankruptcy Slowdown; What’s Next?

by George Putnam, III
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Submitted by George Putnam, III as part of our contributors program.

Record-Shattering Chapter 11 Bankruptcy Slowdown; What’s Next?’s research reveals that current corporate bankruptcy activity, or unprecedented lack thereof, just up-ended historical Chapter 11 benchmarks and pundit expectations with zero public filings in the entire month of January 2014. In fact, up until the February 2nd Tuscany International Drilling Chapter 11, the last public company to seek U.S. Bankruptcy Court protection (OCZ Technology Group) was in early December?making this 60-day stretch a truly record-shattering dry spell.

“We were expecting a lot of action on the restructuring and insolvency front, but what we got were fewer Chapter 11 filings, especially among middle market companies,” says Jeffrey Testa, a Newark, N.J.-based McCarter & English bankruptcy and restructuring Partner who represents creditors, debtors and trustees. Edward I. Altman, Max Heine Professor of Finance at the NYU Stern School of Business and Director of Credit and Fixed Income Market Research at the NYU Salomon Center, adds, “Yes, it is unusual that Chapter 11 public company filings are Zero for a full month, usually the median month is about 4-5.” Until this year, recent bankruptcy trends indicated a slow rise in Chapter 11 activity in the month of January: 2011, 2012 and 2013 reported respective filing counts of seven, eight and nine.

The second-closest year in terms of the number of Chapter 7/Chapter 11 filings was 2006, which saw four public bankruptcies in the month of January; while 2001 and 2002 tie for first place honors with 20 public filings each during the first month of the calendar year. Combined total asset calculations reveal January 2002 as the frontrunner with more than $55 billion, followed closely by 2009’s nearly $52 billion.

Full year filing count and combined asset total accolades go to 2001 (266 public bankruptcies) and 2008 ($1.2 trillion in assets), respectively. 2008’s staggering asset count can be explained, in large part, by Lehman Brothers ($691 billion) and Washington Mutual’s ($328 billion) Chapter 11 bankruptcies.

The absolute lack of bankruptcies in late 2013 and early 2014 caught many industry insiders off guard. Testa details how this unprecedented and unexpected decline came to be: “For every reason there should have been filings, there were factors that minimized them. Lenders have practiced forbearance rather than taking the collateral and, in their eyes, a marginally performing loan can be acceptable for the time being if revenues are covering operations. Filing for protection is seen as expensive, which eliminates the smaller filings and creates a trend toward out-of-court resolution. There’s also a growing realization that not every restructuring results in the emergence of a successful, reorganized and ultimate profitable entity. So alternate routes—state court receivership and assignment proceedings and operating Chapter 7 proceedings, where lenders play a role by funding a more moderate budget—are in vogue. And hope springs eternal among secured creditors, who foresee possible improvement in operational cash flow and the value of collateral over time.”

There’s no doubt that corporate filing counts have plummeted, but many agree that a change is likely in the air. Altman remarks, “I expect filings to pick up, however, in 2014, especially if liquidity dries up some as a result of developing country problems escalation. I think the latter is a distinct possibility.” Testa agrees and identifies some potentially vulnerable sectors: “There are some factors that still seem to point to the probability of increased filings. Interest rates seemingly have nowhere to go but up. The gaming and wireless sectors appear vulnerable. Regardless of how you view the insurance layer, the Affordable Care Act will have a significant economic impact on industries where hourly employees are prevalent and unions are not. Coal is certainly out of favor, and the international markets remain unstable. So on balance I think there will be more filings in the medium-term future?there couldn’t be fewer?but only time will tell.”

As always, will continue to bring you historic corporate filing statistics and breaking news—if and when this much-anticipated uptick comes to fruition.

Disclaimer: collects its information from the U.S. Bankruptcy Court, SEC and FDIC; and opinions expressed within this release are those of the quoted individuals and do not necessarily reflect the views of the publisher: New Generation Research, Inc. Although all sources are believed to be reliable, accuracy cannot be guaranteed. New Generation Research thoroughly analyzes and audits all bankruptcy and financial figures; however, certain details may require adjustment pending untimely SEC reporting and/or delayed U.S. Bankruptcy Court docketing.

New Generation Research defines publicly traded as those companies with common stock and/or bonds that are publicly-traded on U.S. markets and provides pre-petition total asset figures (taken from each debtor’s most recent Annual Report filed with the SEC).

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