DELAWARE: An Introduction to Bankruptcy/Restructuring

Delaware: Bankruptcy/Restructuring Overview 

In 2020, we expected an increase in restructuring activity across a number of industries due to onset of the COVID-19 pandemic (the "Pandemic"). Indeed, unprecedented travel restrictions, prohibitions on social and business gatherings and "stay at home" directives issued by many jurisdictions (at both national and state levels), among others, imposed significant and deleterious effects on the U.S. and worldwide economies. The impact has been felt by business enterprises large and small across a vast number of economic sectors. Industries experiencing financial stress before the Pandemic have been pushed to the breaking point. And those companies that sought Chapter 11 protection before the onset of the Pandemic and obtained "moratoriums" or stays of their Chapter 11 cases will soon face the harsh reality that accompanies lifting of those stays.

While many businesses received some financial relief through the CARES Act and the Paycheck Protection Program (PPP), for some that relief will prove temporary, and they eventually will face a day of financial reckoning. In 2021, we expect business organizations that depend on assembling or attracting relatively large groups of people on a day-to-day basis to face significant liquidity problems as government limitations on gatherings linger and special financing programs and legislatively imposed prohibitions on enforcement remedies expire. Industries we expect will continue to suffer in 2021 from the Pandemic’s fallout – even while the Pandemic subsides, vaccinations increase and the United States economy recovers more broadly – will include the following:

Retail 

Many of the enterprises that operate in this sector were experiencing financial stress before the Pandemic. To be sure, the retail industry has been struggling with declining revenues for years due to a growing consumer trend of online shopping. The Pandemic has exacerbated an already difficult economic situation for traditional brick and mortar retailers – particularly those who have no material online presence or who lag behind their peers. National or local restrictions intended to lessen the risk of spreading COVID-19 forced many retailers, large and small, to reduce their workforce and close their doors. Effectively, these retailers experienced substantially decreased revenue from in store purchases. Many of these retailers have been forced into liquidation and/or bankruptcy and many more face liquidity strains and potential bankruptcy filings in 2021. Rent abatement or rent deferral issues were litigated in several 2020 retail bankruptcies and such issues may be front and center in 2021 retail cases.

Manufacturing 

Makers of specialty parts or equipment that require on site assembly suffered (and continue to suffer) from Pandemic-related restrictions and employee fears. As a result, many manufacturers, including original equipment manufacturers in the automotive industry that depend upon specially tooled parts, lagged behind, could not fulfill orders and/or were forced to shut down. Pace Industries, for example, a vertically integrated supplier of die cast and finished products at seven production facilities in the U.S., and the sole source supplier to many of its customers, was forced by the Pandemic to close six of its U.S. facilities. It and a number of its affiliates commenced their bankruptcy proceedings on April 12, 2020.

Hospitality 

Many hotel and motel chains continue to experience significantly decreased revenues due to the cancellation of significant events in many cities and reduced revenue from tourism due to travel and gathering restrictions. While the ease of Pandemic-related restrictions and increased vaccinations presumably will help reverse this trend, we expect that many businesses within this sector will not rebound to pre-Pandemic levels until 2022, assuming they are able to recover at all.

Travel and Leisure 

Restrictions on travel have negatively affected the performance of businesses that depend on business and leisure travel to sustain revenues. Airlines, cruise lines, car rental, cab and bus companies fall within this category.

Entertainment 

Last year, formal and casual dining businesses, as well as movie theaters and other entertainment spaces, were initially required to cease operations in numerous locations. While some of these businesses have been permitted to resume operations on a modified basis (for example, operate at reduced capacity), they are almost certainly suffering from significantly decreased revenues. For example, Ruby Tuesday Restaurants, CraftWorks, Alamo Drafthouse Cinema and Punchbowl Social, operators and franchisors of restaurants, breweries and theaters have all been forced into bankruptcy proceedings due to the Pandemic. It remains to be seen whether the public at large will be willing to return to these sort of establishments in sufficient numbers given that many have discovered other forms of entertainment.

Office/Business space lessors 

Commercial real estate developers and lessors likely will feel the brunt of many businesses whose management and employees have discovered successful strategies for remote operations. Forced to become comfortable using new technologies like Zoom and Microsoft Teams, many businesses may look to downsize their office space in favor of permitting – and even encouraging – employees to continue working remotely. This shift in demand away from expensive multi-year leases is certain to put a significant financial strain on companies in the business of owning and leasing office space.

Energy 

While the energy sector was suffering well before the onset of the Pandemic, the pro-environment/anti-fossil fuel policies favored by the Biden administration may do little to improve the sector’s outlook. Companies in the oil, natural gas and coal exploration and production industries potentially may face increased regulation, limitations on available land and alternative and clean energy sources and products. Many banks loan to oil and gas producers based upon total oil and gas reserves, as well as the forecasted price of oil, and such metrics are typically reviewed twice a year. Absent a surge in demand, moderate supply and favorable pricing, this industry will continue to struggle and consolidate.

Also not to be overlooked is the "trickle down" effect that 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 the pain this sector has and continues to experience.

Medical service providers and pharmaceutical companies 

Hospitals and general and acute care facilities have had to focus on responding to the Pandemic, treating those infected and delaying or forgoing more lucrative procedures. These important businesses have suffered unexpected and significant financial strain and many likely will require state and local government support to avoid the need for some form of debt restructuring. Moreover, thousands of public and private plaintiffs continue pursuit of massive recoveries in opioid litigation involving many large medical and pharmaceutical-related corporate enterprises. It remains to be seen whether already-pending multi-billion dollar bankruptcy cases (such as those filed by Purdue Pharma and Mallinckrodt) are followed in 2021 by other opioid defendants searching for ways to limit, resolve, and/or restructure around alleged opioid liabilities.