Brown on Business

August 10-16, 2020

U.S. bankruptcies not at Great Recession level despite recent famous COVID-19 defaults


By Wesley Brown


As we speak, U.S. lawmakers in Washington, D.C., are still debating the particulars of another $1 trillion-plus COVID-19 stimulus package meant to save the day. In the scheme of things, the biggest fear that nearly everyone in America has is that the ongoing pandemic will push the world’s largest economy off a cliff.


The good news is that despite the recent economic fallout – including the July 30 Bureau of Economic Analysis report showing U.S. GDP growth shrank by a record 33% in the second quarter – one measure of American business health shows that business failings are not as widespread as earlier predicted despite some well-known brands that have sought Chapter 11 protection.


Notwithstanding the sharp rise in unemployment due to the COVID-19 pandemic, personal and business bankruptcy filings fell just 11.8% for the 12-month period ending June 30, 2020, according to statistics released by the Administrative Office of the U.S. Courts on July 29. Nationwide, annual bankruptcy filings totaled 682,363 for the first six months of 2020, down 13.3%, compared with 773,361 cases a year ago.


Concerning U.S. business bankruptcies, default filings remained virtually identical to a year before at 22,482. Non-business personal filings fell by 12.1%, to 659,881 in the year ending June 30, 2020, compared with 750,878 in the year ending June 2019.


According to federal court officials, U.S. bankruptcy filings tend to escalate gradually after an economic downturn starts. Following the Great Recession, new filings escalated over a two-year period until they peaked in 2010. That last downturn largely hit the U.S. financial sector, resulting in more than 500 banking failures linked to the subprime mortgage crash.


The bad news for the current COVID-19 recession, noted U.S. Bankruptcy Court officials, is that some default filing activity may have been affected by pandemic-related disruptions at federal courts across the U.S., many of which have limited public building access since mid-March. 


That means that the U.S. economy could still see a possible deluge of new filings the second half of 2020 as COVID-19 cases continue to spike in Arkansas and across the U.S. In recent weeks, Wall Street news has centered around several new Chapter 13 filings in the retail, restaurant, oil and gas, and the aerospace and aviation sectors, all industries impacted by social distancing and shelter-in-place orders.


Since COVID-19 was first declared a pandemic in March, JC Penney, Nieman Marcus, Hertz, J. Crew, Chuck E. Cheese, California Pizza Kitchen, GNC, Golf’s Gym, Men’s Wearhouse, Chesapeake Energy, Noble Energy Corp., Virgin Airlines, and several Wendy’s and Pizza Hut franchises have sought Chapter 11 protection. Now with big business on Wall Street, Chapter 11 allows a bankrupt company to remain in business by restructuring its finances through a plan of reorganization approved by the federal bankruptcy court. 


In Arkansas, U.S. Bankruptcy Court data shows there have been 9,730 defaults in the Natural State through June 30, down 8.4% from 10,620 a year ago. The Arkansas bankruptcies include 33 business filings with the remaining defaults almost evenly split between Chapter 7 and 13 at 4768 and 4755, respectively. 


Today, the main difference between Chapter 7 and Chapter 13 personal bankruptcy filings is the former allows debtor’s assets are sold off to pay off creditors. The latter default allows debtors to restructure their past debt by negotiating with creditors through the court to alter the terms of the loan without having to sell-off assets. One the preferred non-business filing, many debtors now avoid Chapter 7 altogether due to a strict means test set up under former President George W. Bush in 2005.


Congress also gives wide latitude to Wall Street and corporate entities to restructure and pay off debts under Chapter 11, even when executives made bad business decisions that lead to default. For example, famous gunmaker Remington filed for Chapter 11 protection for the second time in two years on July 28, citing assets of only $100 million and bills and liabilities topping a half-billion dollars.


In Arkansas, Little Rock-based telecom Windstream Holding Inc. will soon emerge from its Chapter 11 restructuring later this month with a reorganization plans that reduces the former Alltel subsidiary’s debt by $4 billion and gives the rural telecom access to $2 billion in new capital to expand its gigabyte internet service nationwide. 


Originally, Windstream and all its operating subsidiaries first filed its voluntary petitions for Chapter 11 reorg on Feb. 25, 2019. The former publicly traded telecom, which has nearly 1,500 employees in Arkansas and 13,000 nationwide, sought bankruptcy protection amid a lightning-fast collapse of investor and shareholder confidence in the company’s future 18 months ago.


The bankruptcy filing followed a Feb. 15, 2019, ruling by U.S. District Judge Jesse Furman in the New York federal court that ruled Windstream violated bond agreements after splitting off the former Communications Sales & Leasing (CS&L) in April 2015.


Furman’s decisive ruling arose from challenges by Aurelius Capital Management and U.S. Bank National Association that the 2015 deal was invalid under the terms of a debt exchange offer and consent solicitations in respect to senior notes issued by its Windstream Services LLC to finance the spinoff of the Little Rock-based real estate investment trust (REIT), which is now known as Uniti Corp. The court further ruled that Aurelius was entitled to a $310.5 million judgment, plus interest after July 23, 2018.


Almost exactly a year ago, Windstream and Uniti entered into mediation over a controversial master lease agreement provides for annual rent of $659 million to Uniti paid in equal monthly installments in advance, with an annual base rent escalator of 0.5%, according to securities filings. 


In its recent second quarter earnings report, Windstream said the federal Bankruptcy Court in Manhattan confirmed its plan of reorganization on June 25. “With our plan of reorganization confirmed by the court, we are poised to emerge later this summer from restructuring stronger than ever to expand broadband to rural America and help businesses succeed in the digital transformation,” said Windstream President and CEO Tony Thomas.


In a conference call with Wall Street analysts on July 30 following the release of the mixed second quarter earnings report, Thomas again emphasized that the negotiated Uniti settlement will enhance Windstream’s cash flow profile by nearly $300 million per year from 2021 to 2024. 


“As a private company, Windstream will have increased flexibility to invest in our network, accelerate our transformation and return to growth,” said Thomas, who also reached a five-year deal to continue as the company’s chief executive with a base annual salary of $1 million.


Despite assurances of Windstream’s bright future, the former Fortune 500 telecom still has a tough road ahead to return to profitability as a rural broadband provider with the mainly the same executive team that push the company into bankruptcy. In the most recent quarter that ended June 30, Windstream reported a second quarter loss of $162.4 million.


Given the growing need for better broadband service and high internet speed in rural areas, which have been heightened during the pandemic with remote workplaces and virtual schools, only time will tell if Windstream and others Chapter 11 graduates are successful.  



  • Wesley Brown
    Wesley Brown