The COVID-19 pandemic has disrupted many businesses leaving them in financial shambles and forcing others to opt for bankruptcy protection - under Chapter 11 or Chapter 7.
Although almost all industries have suffered a setback, some have been affected more than others. The industries facing extreme financial loss include retail, restaurants, energy, industrial, and hospitality. Retail is probably one of the hardest-hit industries to date.
Weak companies are filing for Chapter 11 bankruptcy
In the US, the CARES Act has provided loans and grants to certain businesses under particular criteria. If a business is able to take advantage of these loans and grant programs, they could weather the storm, but for others, bankruptcy is the only option.
Generally, there are two ways to file for bankruptcy—under Chapter 11 or Chapter 7. It all depends on the financial state of the business, its liquidity status, and whether it can survive in these uncertain times.
People who believe they can survive the bad times and have a chance of operating post the pandemic can opt for Chapter 11, but those who are doubtful of that can make good their losses and sell off their assets and liquidate the business under Chapter 7.
Recent data show 722 companies sought bankruptcy protection around the US last month, a 48% increase from last year during the same period. In fact, corporate Chapter 11 filings increased to a record 560 new cases during the month of April, which is a 26% increase from the 444 filings the previous year.
"This is a sign that already weak companies are succumbing to the lockdown recession," Chris Kuehl, an economist with the National Association of Credit Management, which tracks bankruptcies, said in a research note. Businesses that were struggling before the pandemic "are starting to get in some real trouble," he added.
Some prime examples are JC Penney, Neiman Marcus, Centric Brands, and J. Crew – all of which filed for bankruptcy the past month to seek protection under Chapter 11.
To be fair, these retail companies were already struggling to hold their heads afloat before the pandemic. The new ways of retail functioning and online shopping shift had already eaten into their profits.
Other big companies that filed for Chapter 11 are Gold's Gym and Hertz. Energy companies such as Whiting Petroleum and Diamond Offshore Drilling have joined in stemming the tide by filing for bankruptcy protection.
Hertz says it intends to stay in business while restructuring its debts and emerging a financially healthier company. "The impact of Covid-19 on travel demand was sudden and dramatic, causing an abrupt decline in the company's revenue and future bookings," said the company's statement. "Uncertainty remains as to when revenue will return and when the used-car market will fully re-open for sales, which necessitated today's action."
Gym chain Gold’s opted for a permanent closure of 30 company-owned gyms. More than 700 gyms operate around the world under the Gold's brand, most of which are franchises.
Whiting Petroleum, the Denver-based company, filed for bankruptcy on April 1. Under a restructuring plan, they will cut $2.3 billion of their $3.6 billion debt. The company will hand over 97% of its equity to creditors and give existing shareholders 3% of the reorganized company's shares, according to the filling.
Diamond Offshore Drilling filed for bankruptcy protection in Texas. In all 15 of its group companies have sought protection under Chapter 11. The company cited the fall in demand for oil due to oversupply and the price war between the OPEC countries and Russia as the reason for the Chapter 11 filing.
The five biggest energy companies in Europe and the US have cut spending on oilfield equipment and services.
How bad is filing for bankruptcy?
A bankruptcy filing does not mean a company will be forced out of business. In fact, it protects a company from complete closure and buys it time to regroup and find sources of finance. Most companies hire professionals to come up with plans to restructure their budgets and debt ratios. Many companies have gone through the process and gone on to post record profits, including automaker General Motors and many of the nation's airlines.
Although there are many that have not survived the process. It all depends on a lot of factors, including their financial health before a crisis, the market scenario, industry health, and more.
Most companies mentioned above are hopeful of coming out of the crisis by August end.