Delaware: Bankruptcy/Restructuring Overview
We expected an increase in restructuring activity across a number of industry sectors even before the World Health Organization declared the novel coronavirus known as COVID-19 a "worldwide pandemic" in March 2020 (the "Pandemic"). In light of the consequences of the Pandemic, we expect the level of activity to increase substantially, possibly on par with that experienced during the Great Recession in 2008.
Unprecedented travel restrictions, prohibitions on more than a limited number of persons gathering together in one location, "stay at home" directives issued by many jurisdictions (at both the national and state level), among others, have already had a material (some might say devastating) impact on the economy in the US and worldwide. Business enterprises large and small across a vast number of sectors of the economy are currently experiencing the impact. Additionally, it has placed even greater stress on industries that were experiencing financial stress before the Pandemic. Moreover, many companies already in Chapter 11 proceedings sought "moratoriums" or stays of their Chapter 11 cases until the Pandemic is contained because they do not have employees on site and cannot attract sufficient number of consumers to conduct business.
The Pandemic's effect simply cannot be understated. In the US, virtually every state has imposed significant travel restrictions and prohibited people from congregating in groups of 50 or more at many places of business, with some limited exceptions. As of April 3, 2020, forty-six states have enacted policies requiring non-essential businesses to shut down until the Pandemic is contained. In addition, many states in the US have strongly encouraged employees in businesses viewed as essential to work from home and avoid going to their place of employment until the Pandemic is contained. Not all businesses are capable of operating remotely. Although these restrictions may be relaxed or lifted in the near future, their impact could very well mark the end of many businesses.
For example, any business organization that depends on assembling or attracting relatively large groups of people on a day-to-day basis is quite likely already, or to soon be, facing substantial liquidity problems. Industries negatively affected by these restrictions potentially include:
Makers of specialty parts or equipment that require on site assembly, for example, whose employees are restricted from coming to work. Many original equipment manufacturers in the automotive industry are dependent upon specially tooled parts for their vehicles. Pace Industries, a vertically integrated supplier of die cast and finished products at seven production facilities in the US, and the sole source supplier to many of its customers, was forced by the Pandemic to close six of its facilities in the US. It and a number of its affiliates commenced their bankruptcy proceeding on April 12.
Many hotel and motel chains are experiencing significantly decreased revenues due to the cancellation of significant events in many cities and reduced revenue from tourism due to travel restrictions.
Travel and Leisure
Restrictions on travel can negatively affect the performance of businesses that depend on business and leisure travel to sustain revenues. Airlines, cruise lines, cab and possibly bus companies fall within this category.
Formal and casual dining businesses, and movie theater owners, in many locations were required to cease operations and are very likely suffering from significantly decreased revenues. For example, CraftWorks, one of the US’s leading operators and franchisors of restaurants and breweries, has halted its bankruptcy proceeding due to the Pandemic.
Medical service providers
Hospitals and general and acute care facilities, which have had to focus on responding to the Pandemic and treating those infected while delaying or forgoing performing more lucrative procedures, have suffered unexpected and significant financial strain that will likely require state and local government support in order to avoid the need for reorganization proceedings.
Many of the enterprises that operate in these industries were experiencing financial stress before the Pandemic. The retail industry, for example, has been struggling with declining revenues for years due to consumers' trend to take advantage of online shopping opportunities. The Pandemic promises to make a very difficult economic situation much worse. National or local restrictions intended to lessen the risk of spreading COVID-19 have caused many retailers, large and small, to close their doors and furlough or fire their employees. Effectively, these retailers are experiencing "zero revenue" from in store purchases. We will not be surprised to see many of these retailers forced into liquidation.
Indeed, as indicated above the Pandemic has already disrupted the planned inventory liquidations (so-called "Going Out of Business Sales") planned by many retailers who had commenced Chapter 11 bankruptcy proceedings to liquidate their inventory and attempt to find a buyer for their other tangible and intangible assets. Modells Sporting Goods, a sporting goods and apparel retailer, commenced its Chapter 11 bankruptcy on March 11, 2020, with plans to liquidate its inventory through going out of business sales. Within days, the Pandemic reduced customer foot traffic to nearly zero. Consequently, Modells was forced to seek a stay of its case until economic conditions permit its liquidation efforts to continue. Similarly, Art Van Furniture, a furniture retail chain, was forced to seek a similar stay of its bankruptcy cases commenced on March 8, 2020. Unfortunately, when the parties were unable to agree on the terms of the stay, the company had no choice but to convert its cases to cases under Chapter 7 of the Bankruptcy Code.
Other economic and non-economic factors will likely contribute to the increase in restructuring activity. The historic crash in oil prices and the continued volatility of the price of oil and natural gas will make it increasingly more difficult for producers to borrow money from banks who are reluctant to lend into a depressed market. Many banks loan to oil and gas producers based upon a company's total oil and gas reserves and the forecasted price of oil, and typically review these metrics twice a year. Although Russia and Saudi Arabia appear to have resolved their differences and the price of oil has risen as a result, whether the price will remain stable and be sufficient to sustain oil and gas producers remains to be seen.
Also not to be overlooked is the "trickle down" effect the uncertainty surrounding oil prices will have on companies that provide goods and services to oil and gas producers, particularly those companies which provide a specific good or service, and are dependent upon the revenues received from oil and gas producers. Suppliers of proppant to fracking operations, drilling rig manufacturers and oil and gas transportation companies are all sure to share in the pain caused to the sector.
We also anticipate an uptick in restructuring activity in the pharmaceutical industry, unrelated to the difficulties caused by the Pandemic. Manufacturers, distributors, and others involved in the making and distribution of opioid-based medications have been experiencing significant financial stress from potential exposure to wrongful death and other claims brought by many States and private litigants, the cost of litigating these claims, and the risks of an adverse judgment. Many of these businesses are co-defendants in many of the pending actions. At least one of these companies, Purdue Pharma, sought bankruptcy protection in 2019. Moreover, it has been widely reported that Mallinckrodt Pharmaceutical intends to commence bankruptcy proceedings to make a settlement of its opioid-related liability. We will not be surprised to see additional companies in this space seek bankruptcy protection in the coming year in order to manage their potential exposure.