ANALYSIS: Six Trends in the Latest Chapter 11 Wave

Many bankruptcy practitioners expected a tidal wave of Chapter 11 cases at the outset of the Covid-19 pandemic, but the increased caseload wasn’t as dramatic as predicted, and was followed by a bankruptcy drought.

However, the long-anticipated bankruptcy wave is finally crashing on our shores this year. Chapter 11 filings are up, promising steady work for bankruptcy and restructuring attorneys for quite a while.

I’ve taken a look at Chapter 11 bankruptcy cases that have been filed since the beginning of the year, and have identified six trends that make this latest wave unique.

1. Headwinds Driving Companies into Chapter 11

One of the most important documents to examine when a company files Chapter 11 is the first-day declaration. This affidavit—usually provided by one of the bankrupt company’s officers—helps the bankruptcy court and interested parties understand the company’s business, its capital structure, its need for various forms of immediate relief upon filing, and the events which led to the bankruptcy filing.

First-day declarations in 2023 frequently cite similar macroeconomic “headwinds": the Covid-19 pandemic, inflation, rising interest rates, supply chain challenges, the war in Ukraine, and tightening lending requirements.

Many declarations recount failed attempts to restructure outside of bankruptcy, but ultimately a need to turn to Chapter 11.

2. De-SPACs in Too Deep

Special purpose acquisition companies (SPACs) were all the rage in 2020 and 2021. Through a SPAC, a group of investors called sponsors initially form a corporation and quickly take it public via an initial public offering (IPO). Once the offering is cleared by the SEC and the SPAC’s shares are trading on a public exchange, the sponsors then seek, through the SPAC, to acquire a privately held company. Taking a target company public through a reverse merger in this way is known as a de-SPAC transaction.

Several de-SPACed companies have turned to Chapter 11 in recent months. Many of these companies are in biotech and have struggled to find capital. Often these companies were not left with enough cash after the de-SPAC transaction and may have been early-stage companies that weren’t developed enough to generate sufficient revenue to service their debt obligations.

Some examples of de-SPAC Chapter 11 bankruptcies from this year involved the following companies:

• Rockley Photonics Limited;
• Starry Group Holdings, Inc.;
• Boxed;
• Virgin Orbit; and
• Kalera Inc.

While the value of de-SPACed companies has gone down, Chapter 11 may provide opportunities for investors to acquire stakes in future-oriented businesses at bargain basement prices.

3. ‘Chapter 22': Getting Back Up After a Wipeout

Bankruptcy practitioners colloquially refer to a company that files Chapter 11, reorganizes, and files Chapter 11 again within a relatively short period of time as a Chapter 22 case.

This year is on track to be one of the highest years for Chapter 22 cases ever and, of these cases, the average period from emergence from the first Chapter 11 to the filing of the second is one of the lowest in the past decade, according to BankruptcyData. While some Chapter 22 companies that reorganized prior to 2020 can point to economic strain from the pandemic, many more of these companies only emerged from bankruptcy within the past two years, often citing changing conditions like inflation and increased interest rates.

With the rise of repeat bankruptcies, bankruptcy courts might be more closely scrutinizing a plan’s satisfaction of the Bankruptcy Code’s feasibility test, which requires that confirmation of a plan is “not likely to be followed by the liquidation, or the need for further financial reorganization.”

Companies filing Chapter 22 cases in 2023 include the following:

• David’s Bridal;
• Monitronics;
• Catalina Marketing;
• Avaya;
• Tuesday Morning; and
• The Rockport Company.

4. The Banking Crisis—Rogue Wave Averted?

The failure of Silicon Valley Bank in March 2023 sent shockwaves through the economy. Stocks of smaller to mid-size banks plummeted. Two more bank failures followed in its wake: Signature Bank and First Republic Bank. SVB Financial Group, the holding company of Silicon Valley Bank, filed bankruptcy on March 17, 2023, but there have been no new bank holding company bankruptcies since then.

While it may still be too early to make pronouncements, 2023’s banking crisis so far pales in comparison to 2009 and 2010, when there were 140 and 157 bank failures, respectively, and many corresponding bank holding company bankruptcy cases.

Companies that filed Chapter 11 after the SVB collapse haven’t cited the springtime banking crisis in first-day declarations as a major event precipitating their bankruptcy filings. For example, Boxed, an ecommerce grocery startup that filed bankruptcy on April 2, had most of its cash deposits at SVB, but didn’t even mention the SVB crisis in its first-day declaration.

5. Healthcare Caught in a Perfect Storm

Healthcare-related companies are also experiencing distress and seeking relief in Chapter 11. These debtors not only include healthcare providers (hospitals, senior living communities, skilled nursing facilities), but also businesses that produce medical equipment.

Healthcare companies provided an array of reasons for their financial difficulties, including:

• a decline in the number of patients seeking non-Covid related healthcare in large part because of the pandemic;
• staffing shortages and demands for higher wages due to the exodus of nurses from the profession; and
• the failure of Medicare and Medicaid reimbursement rates to adjust to the significant cost increases for medical services, supplies, and medications.

Medical equipment suppliers have also been affected by some of the same factors affecting healthcare providers, but additionally emphasize supply chain disruptions, increased interest rates, and reduced reimbursement.

Healthcare Chapter 11s tend to be somewhat smaller in asset size than cases in other industries, but they present a level of complexity that requires legal and financial professionals with industry-specific expertise.

Companies in the healthcare industry that filed Chapter 11 in 2023 include:

• Envision Healthcare;
• GenesisCare;
• Beverly Hospital; and
• Madera Community Hospital.

6. Retail Companies Struggling to Stay Afloat

The retail sector was one of the hardest hit areas during the Covid-19 pandemic, representing many of the largest bankruptcies of 2020. Chapter 11 debtors included familiar shopping mall brands and brick-and-mortar chains.

This year has also seen a significant number of retail companies filing Chapter 11, including online retailers. The first-day declarations have cited reduced consumer spending due to inflation and the challenges presented by global supply chain disruptions as some of the factors contributing to their financial troubles.

Prominent retail Chapter 11s of 2023 include these companies:

• Party City;
• Bed Bath & Beyond;
• Independent Pet Partners; and
• Instant Brands.

Certain retailers, especially those focused on “stay-at-home” activities, may have experienced a boom during the pandemic, but now may be suffering due to changing consumer behavior post-pandemic. Chapter 11 may provide these companies an opportunity to rid themselves of expensive leases at underperforming stores and financing opportunities unavailable outside of Chapter 11.

Bloomberg Law subscribers can find related content on our Bankruptcy Practice Center and Chapter 11 resources.

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