Late last month, I talked a bit more about what many assume is a coming wave of bankruptcies in the US. It was the second time in three weeks I broached the subject.
In essence, the argument is that an acute liquidity crunch is destined to manifest in an insolvency crisis for some firms, the best efforts of lawmakers and the Fed to keep everyone afloat notwithstanding.
As of May 30, almost 100 companies with at least $50 million in liabilities had filed.
Read more: America’s Big Bankruptcy Questions: Who, When And How Many?
Fast forward a week (give or take) and the latest numbers from Epiq (provided by the American Bankruptcy Institute, “ABI”) show chapter 11 filings surged 48% last month.
Specifically, there were 722 of them, making May 2020 the worst May since 2011 (there were more than 800 in May 2010). Month-over-month, the increase was 29%.
“Companies that tried to shore up their balance sheets at the beginning of the year represent the initial wave of chapter 11s due to the economic crisis brought about by the COVID-19 pandemic”, ABI Executive Director Amy Quackenboss said.
At first glance, the numbers for the final week of May appear to paint a disconcerting picture. Chapter 11 filings from May 25 to May 31 were up 168% on year to 241.
What you’ll notice immediately is that the trend in other categories is far more benign – in fact, bankruptcies are falling in aggregate.
It’s the same story for the full month. “Total commercial filings decreased 28% in May [and] total bankruptcy filings were down 42%”, ABI goes on to say, adding that “total consumer filings decreased 43%”.
In the linked post above, I talked about the difficulty inherent in interpreting the chapter 11 numbers. Recapping the basics is Robert Lawless. “Every petition filed by every subsidiary in a corporate group gets counted as a case, and the number of subsidiaries in a corporate group is arbitrary, [so] one economic unit can generate what looks like many bankruptcy filings”, he said last week, adding that “this seems to be exactly what happened the last week of May when there were 242 chapter 11 petitions”.
As it turns out, one chain of bakeries accounted for 104 of the total 242 filings represented by the massive spike seen in the second chart above. Here’s Bloomberg:
The U.S. arm of bakery chain Le Pain Quotidien filed for bankruptcy in Delaware with plans to sell itself for $3 million to avoid shutting down for good, court papers show.
The Chapter 11 petition allows Le Pain Quotidien to rework its debts and carry out a sale to Aurify Brands LLC, which requires court approval. Without the sale, the company would’ve had to liquidate its 98 U.S. stores, proposed Chief Restructuring Officer Steven Fleming said in a court declaration.
The chain’s sales were slipping amid heavy competition and lack of investment in its stores even before the Covid-19 pandemic forced the shuttering of all its U.S. locations, Fleming said. The U.S. arm reported a nearly $17 million loss on $153 million in sales last year.
“It appears most every location was a separate LLC or corporation”, Lawless notes.
Indeed, there were 179 “child cases” in the final week of May. In May of 2019, there were just 14. That’s where the apparent “explosion” of filings comes from. The figure below (from totals calculated by ABI’s Ed Flynn) breaks things down for a handful of notable cases.
Still, the outlook is far from sanguine, even when you take account of the fact that the headline numbers are, in a sense, inflated.
For example, Flynn writes that the number of prominent cases filed during the week (shown in the chart) “reads more like a list of prominent filings for a month or two during more normal times”.
Lawless strikes a similar tone. “I am not Pollyannaish about the economy or the chapter 11 rate, which is increasing, but, I am in favor of accurate numbers”, he says, adding that “you can’t say for sure what the exact rise is in chapter 11s without doing the hard work of going through the filings and eliminating the affiliates during the periods you want to compare”.
