OHIO: An Introduction to Bankruptcy/Restructuring

Ohio: Bankruptcy and Restructuring Overview 

Prepared by Hahn Loeser & Parks LLP 

Assuming that the immediate threat of the COVID-19 pandemic eases due to the combined effects of vaccinations and continual safety precautions, we anticipate that the corresponding financial and operational concessions afforded to many distressed businesses by lenders, lessors, and trade creditors will diminish with it.

Ohio Overview 

Ohio is the seventh largest state by population, with three major metropolitan cities (Cleveland, Columbus and Cincinnati) and four smaller but influential markets (Dayton, Akron, Toledo and Youngstown). By asset size, three top-30 domestic banks are headquartered in Ohio, with three additional top-ten domestic banks each having substantial loan and employee volume within the state. Major economic sectors include healthcare, leisure and hospitality, financial and insurance services, professional services, retail, agriculture, higher education, and manufacturing.

Comparative Bankruptcy Activity 

Without counting all debtors filing a petition as part of jointly administered bankruptcy cases, during 2020 there were 33 statewide Chapter 11 filings, compared with 40 in 2019. The decrease in filings perhaps reflects the combined effects of market-imposed patience by lenders facing plummeting values of most collateral, trade creditors desiring to preserve important customers pending pandemic recovery, and cash flow assistance from government-backed Paycheck Protection Program and Economic Injury Disaster Loans. During 1Q 2021, however, there were 24 statewide Chapter 11 filings, a 200% increase over 1Q 2020. Additional stimulus from the American Rescue Plan Act, enacted March 11, 2021, could dampen this immediate spike in filings.

Ohio continues to attract “mega” bankruptcies, ordinarily reserved for larger legal markets, with three such cases filed between 2018 and 2020. The sophistication of Ohio’s legal and financial markets, coupled with less congested courts and significantly more favorable professional fee structures than larger markets, make Ohio an increasingly popular jurisdiction in which to restructure. Judicial experience and efficiency are also appealing. The newest appointee to the bankruptcy court in the northern district has a history of significant Chapter 11 experience in Ohio and Delaware, joining several similarly situated colleagues. In addition, the bankruptcy court in the southern district adopted specific procedures for complex Chapter 11 cases in an effort to streamline case administration.

Troubled Sectors 

After continual job growth since 2011, manufacturing as well as leisure and hospitality began contracting in 2019 and early 2020, a trend exacerbated significantly by the pandemic. Leisure and hospitality in particular have been exceedingly slow to recover, with even newly renovated facilities struggling to attract day-to-day visitors and stable large-scale bookings such as conferences or conventions. There appears, however, to be pent-up demand for live entertainment, on which several venues and ancillary service providers are banking as social distancing restrictions ease. For those looking to enter the leisure and hospitality space near the bottom of the curve, opportunities for distressed acquisitions should begin to present themselves, particularly if frustrated lenders look to exit these credits during 2021 and borrowers seek to avail themselves of bankruptcy protection.

In March 2019, manufacturing jobs began contracting from an eight-year high. Though the decrease was modest throughout 2019 (1.45%), by the end of 2020 employment fell by 6.72%, bringing it roughly in line with 2012 levels, where it remained as of February 2021. In addition to financial strains occasioned by the pandemic and pre-pandemic debt levels that were already heavy, unfunded pension obligations and sizable claims created by employers withdrawing from struggling multiemployer pension plans continue to weigh upon this weary sector. Although the American Rescue Plan Act contains an $86 billion bailout for multiemployer pension funds, it is far from certain whether the relief will be sufficient to discourage ongoing plan withdrawals. We anticipate manufacturing businesses to look to Chapter 11 to buyout debt, restructure pension plans, and resolve general unsecured withdrawal liability claims.

Falling coal and oil prices contributed significantly to a 31% decrease in mining jobs between December 2014 and December 2019, after which the pandemic, coupled with an oversupply of oil throughout much of 2020, caused mining jobs to decrease 16.5% during 2020 alone. As would be expected, ancillary industry service providers suffered as well. Coal does not appear to be headed for a recovery and ancillary service providers fortunate enough to survive this long are well underway in developing alternative business lines utilizing or complementing existing coal-related capabilities. Although barrel prices increased steadily during the first quarter of 2021, this may be too little too late for sector participants at all levels. Were oil and gas to experience a meaningful and rapid resurgence, remaining intrastate capabilities to handle extraction and production needs may be inadequate in the immediate term, due simply to the fact that many sector participants have liquidated over the past several years.

Alternatives to Bankruptcy 

Alternatives to bankruptcy, including receiverships, assignments for the benefit of creditors, and UCC Article 9 secured party sales, continue to be routinely utilized effectively and quickly throughout Ohio. Importantly, Ohio’s receivership statute expressly permits the sale of assets free and clear of liens and claims, making state court receiverships an attractive alternative for lenders, buyers, and even sellers seeking to avoid the attendant cost and complexity of free-and-clear sales in Chapter 11.

Credit Markets 

Banks and other lenders doing business in Ohio appear to be strong—even growing—and sitting on ample cash to lend. A highly competitive lending environment should afford more than sufficient support for businesses seeking to refinance existing debt, expand operations, or enter new markets perhaps by way of distressed acquisitions.