» Bankruptcy tsunami is building in Texas.
Total of companies seeking Chapter 11 has soared, with more on the way
The list is growing: J.C. Penney, Neiman Marcus, Diamond Offshore Drilling, Alta Mesa Resources, Echo Energy, Alta Petroleum, TriPoint Oilfield Services, Sheridan Holding and Stage Stores.
More Texas businesses are filing for bankruptcy this year than during the Great Recession or anytime in the past two decades, and legal experts said the wave of insolvencies and restructurings is still far from breaking or hitting their peak.
Between Jan. 1 and May 5,
“If you are a restructuring lawyer, you are going to be very busy.”
Lou Strubeck of Norton Rose Fulbright
more than 545 Texas companies filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code — up from 234 such filings during the same period in 2019, a 133 percent jump, according to new data provided exclusively to The Texas Lawbook by Androvett Legal Media research.
And bankruptcy courts in the Southern District of Texas — specifically Houston — are the epicenter for the historic number of corporate restructurings expected to be filed this year. So far in 2020, five times more business bankruptcies have been filed in Houston than in any of the other three federal district courts in the state. The Northern District of Texas is a distant second.
“There is a tsunami coming,” said Foley bankruptcy partner Holly O’Neil. “For tens of thousands of retailers and restaurants and other businesses, their incoming revenue completely stopped, but their expenses kept coming. The options for many of these businesses are running out.”
The Androvett data show that an average of 32 Texas companies has filed to restructure each week this year, compared with an average of 13 companies a week last year and 23 corporate bankruptcies each week in the first half of 2017, which was the previous high in the state.
“If you are a restructuring lawyer, you are going to be very busy,” said Lou Strubeck, head of the bankruptcy and restructuring practice at Norton Rose Fulbright. “Oil and gas and the retail sector had a whole lot of stress even before COVID-19. The only surprising thing is that we haven’t seen the explosion of bankruptcy filings already. But they are still coming.”
Several other prominent companies — including CEC Entertainment and Chesapeake Energy — are reportedly preparing bankruptcy filings.
“I expect the volume will go up significantly. We are in the early stages,” said Dustin McFaul, a partner at Sidley Austin in Houston. “This has the makings to be a long, several-year cycle with widespread imbalances to address.”
Stay-at-home delay
The surge of bankruptcies by small-business owners also has been delayed because the stayat-home orders have prevented owners from finding and meeting with lawyers to handle their filings.
Creditors are being patient with retailers and restaurants, at least for a short time, according to McFaul.
“Lessors are not rushing to push out distressed businesses because there’s currently no one lined up to replace tenants,” he said. “A strained revenue stream is better than none at all.”
The same is true in the oil industry, except that energy company restructurings tend to be significantly more complicated because there are so many parties and because the price of oil continues to be unstable.
Lenders aren’t going to be too aggressive in forcing energy companies into court to reorganize, Strubeck said, because “they don’t know what they would do with the assets and they don’t want to run these companies.”
“The big question is, will private equity jump in or are they gun-shy about oil and gas?” said Bill Wallander, a partner at Houston-based Vinson & Elkins.
Matthew Cavanaugh, a bankruptcy partner with Jackson Walker in Houston, said the answer to that question is a reason why courts may have seen fewer prepackaged bankruptcies and more “free fall” bankruptcies.
“In 2015 and 2016, there was a lot of capital waiting to invest, which was important for exiting bankruptcy,” he said. “Right now, there’s not a lot of access to capital.”
Cavanaugh said there is another underlying factor that needs to be considered.
“There’s been so much money pumped into the system by the feds,” he said. “There’s no way to know the impact.”