The economies of the United States, and Texas in particular, are facing a sudden crash in the oil and gas market and an ever-growing impact from the coronavirus. This combination will shape corporate bankruptcies for years. The duration of today’s events is uncertain, but it is certain that bankruptcy relief will be necessary, widespread, and impact nearly every sector of the market.
The Oil and Gas Crisis
Even before coronavirus’s rapid global spread, oil and gas companies were feeling the strain from a steady slide in the price of oil. On January 1, 2020, WTI Crude was $61.06 a barrel. On March 8, 2020, after Saudi Arabia initiated a price war with Russia, oil prices dropped a massive 30%+. As of March 30, 2020, WTI Crude closed trading at $20.23 a barrel. In four months, oil and gas company reserves, which are often used as collateral on lines of credit and other secured loans, fell to one-third of their value. Smaller companies already feeling pressure as a result of increased production costs and plateaued or decreased sales price, may now be losing cash everyday by continuing to pump. Unlike larger companies which may choose to stop production altogether and pay associated fees and costs, smaller businesses are unlikely to have the cash needed to survive a complete shutdown because royalties, salaries, and taxes must still be paid. This lack of cash will result in an increased number of oil and gas bankruptcies.
Deciding where to file a bankruptcy petition is one of the first and most important decisions a business will make with its bankruptcy counsel. Bankruptcy venue rules allow for a lot of latitude in where companies may file. Delaware and the Southern District of New York have long been popular venues for bankruptcy filings.
Recently this has begun to change, and the Southern District of Texas has become a hotbed for commercial bankruptcy filings in general and for energy companies in particular. Judges in the Southern District of Texas have garnered national attention for their friendly Chapter 11 bankruptcy procedures, knowledge, and expertise. Judge Marvin Isgur recently approved the restructuring proposal filed by EP Energy Corporation in the Houston Division of the Southern District of Texas, ruling against the senior bondholders and allowing EP Energy to exit bankruptcy with $3.3 billion less debt.
This growth in energy-based commercial bankruptcies has not only impacted the Southern District. The Northern District of Texas’s Fort Worth Division is also shaping itself into a favorable venue for corporate bankruptcy filings. Many oil and gas companies headquartered in Fort Worth have sought bankruptcy protection right at home. As oil and gas bankruptcies grow, it is expected that the Southern and Northern Districts of Texas will become even more favorable venues for filing.
The Coronavirus Pandemic
The coronavirus pandemic has shattered U.S. economic growth, decimated retirement portfolios of individuals, and placed companies in desperate positions to prevent solvency and cash flow issues. Companies, virtually overnight, have laid off massive percentages of their workforces which has resulted in millions of unemployment claims and anticipated additional job losses for April 2020 of between 500,000 and 5 million. The impact of the coronavirus will result in numerous individual bankruptcies and there will be a corresponding surge in corporate bankruptcies.
Entire industries have already petitioned the government for assistance to survive the pandemic and orders to close businesses. Airlines, hotels, and retail have warned that their entire industries will collapse without relief. Retail has already been on a sharp decline and the coronavirus pandemic will only further exacerbate this problem.
Generally, successful bankruptcy reorganizations resolve problems caused by an outside event’s impact on an otherwise healthy company – an unexpectedly large judgment, changes in laws, temporary mismanagement, or national/global disasters. In fact, this has all been done before. Post September 11, 2001, between 2002 and 2011, American Airlines, Delta, Frontier, Northwest, United and US Airways all filed for Chapter 11, even after some airlines received bailouts from the government.
The solvency and cash flow impacts of the coronavirus make most corporations affected ideal candidates for restructuring under Chapter 11. These companies can get relief from “pre-coronavirus debt,” renegotiate with lenders, and enter into restructured payments to creditors over extended periods of time. The big businesses of America, while severely impacted and hurt by the coronavirus pandemic, will survive through government intervention and/or bankruptcy relief.
It is unclear how small to mid-sized businesses will cope. Currently, several states, counties, and cities are under “shelter-in-place” orders where citizens are requested to remain home and all non-essential businesses must close to limit further spread of the coronavirus. Such businesses do not generally have large reserves of cash to fund complete closure for multiple months. Even if these businesses obtain loans through the SBA, banks, or from lines of credit, it is not guaranteed that the economy will bounce back to a position where paying off these large loans will be easy.
One form of relief for these smaller companies may be the Small Business Reorganization Act (“SBRA”). The SBRA recently went into effect in February 2020. It attempts to further streamline small business reorganizations by providing simplified procedures and eliminating fees usually involved in a Chapter 11 that may otherwise make it cost-prohibitive.
In its original form SBRA was limited to businesses with total debt of not more than $2,725,625. However, the recently signed into law Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) increases the maximum debt to $7,500,000. SBRA also eliminates some costly aspects of Chapter 11, including quarterly U.S. Trustee fees and the requirement to appoint an official unsecured creditors’ committee. However, with SBRA being such a new and untested law, it is too soon to determine if it will accomplish its intended goals.
Importantly, some of the CARES Act’s changes to the SBRA are only temporary. For example, unless extended by future law, the increased debt maximum to $7,500,000 is only in effect for one year. The CARES Act contains a sunset provision that will automatically revert the debt limit increase back to $2,725,625 on March 27, 2021. While the impact of the coronavirus pandemic on small businesses will likely be seen for years to come, businesses above the SBRA’s original debt limit that are considering relief under the Bankruptcy Code will need to act relatively quickly before the increased limit expires.
The combination of the current economic crises facing Texas is likely to fuel corporate restructuring at all levels for years to come. Even before the coronavirus pandemic, law firms were preparing for a surge in oil and gas bankruptcies by adding bankruptcy lawyers to their rosters. Now, not only will bankruptcy professionals assist oil and gas companies during the lowest price of oil in nearly two decades, but they will also help businesses of all sizes and across many industries to reemerge as successfully reorganized debtors, better prepared to rebuild the economic growth lost in the recent months.