15 Sep 2020
Posted in Business Fundamentals
COVID-19 triggers emerging wave of bankruptcy filings in multiple sectors
COVID-19 has triggered several liquidation and bankruptcy filings as top companies seem to have fallen into financial limbo. Poor financial management and slower digital transitions have particularly impacted retailers, and, there have been rising cases of physical retailers defaulting rent payments. The sectors with the most insolvency filings are retail (32%), oil and gas (30%), foodservice (7%) and travel and tourism (7%), according to GlobalData, a leading data and analytics company.
Retail and foodservice companies faced insolvencies due to their inability to swiftly go digital, while oil and gas and tourism faced waning consumer demand. Retail companies such as J.C. Penney and J. Crew are in deep water due to the pandemic’s catastrophic impact.
Rinaldo Pereira, Senior Analyst at GlobalData, says: “For retail chains that were unable to switch to digital sales, the situation worsened due to the shuttering of physical stores and eventually drove a collapse. J.C. Penney’s piling debt and ultralow foot traffic due to prolonged social distancing and quarantine orders forced it to file for bankruptcy in May 2020.”
The oil and gas sector closely followed retail, in terms of the number of bankruptcy filings. A steep downfall in oil demand caused prices to reach lows not seen in decades, with companies including Whiting Petroleum Corp and Chesapeake Energy filing for bankruptcy.
In the foodservice sector, NPC International, Pizza Hut and Wendy’s franchisee, filed for bankruptcy due to its piling debt. McDonald’s, Starbucks and Burger King were able to adapt rapidly to changing consumer trends, but the same cannot be said for smaller restaurant chains, which saw a decline in sales.
In the travel and tourism sector, LATAM Airlines filed for Chapter 11 bankruptcy protection in the US in May. The company was able to secure an additional $1.3bn in funding from Oaktree Capital Management in July and, combined with a $900m convertible loan from other major shareholders, the company hopes this will see it through the crisis without government support. However, a US bankruptcy judge rejected the airlines proposed $2.4bn financing deal in September, which is a setback for the company.
A second airline, Virgin Atlantic, filed for Chapter 15 bankruptcy protection in the US in August, allowing it to shield its assets from US creditors. The airline said that its deal with its stakeholders will support the company without the need for additional funding from the UK Government.
Mentions of ‘bankruptcy’, ‘liquidation’, and ‘insolvency’ have shown a rising trend in all filings of public companies from June to August 2020 (over 250% growth). As identified by GlobalData’s Filing Analytics Database, bankruptcy mentions rose by around 6% in Q1 2020 as compared to the same quarter last year.
Pereira concludes: “Multitudes of unaccounted small businesses have also gone bankrupt during the COVID era. Consumer demand slumps, reduced spending and lingering social distancing have hit companies hard with no respite in sight. Another wave of COVID-19 could trigger further bankruptcies on unprecedented levels.”