Reorg First Day Midyear Review: Retail Woes Continue, New Wave of Filings From Farms, Firearms, Supermarkets Highlight Busy First Half of 2018 for Large Bankruptcies

Bankruptcy filings during the first half of 2018 were driven in part by market headwinds that spilled over from last year - including challenges facing the retail, healthcare and oil and gas industries - as well as a new spike in filings from the farming, media, firearms and technology industries.

Retail chains continue to struggle against an evolving retail economy that favors a shopping experience stripped of mall-based stores. Big brands such as The Bon-Ton, Claire’s and Nine West, which have vast lease portfolios and rely on brick-and-mortar retail sales models, and all of which have filed chapter 11 this year, have been operating at a competitive disadvantage compared with leaner, web-based retailers.

Long-term care hospital operators have continued to file chapter 11 on the heels of dwindling reimbursement rates from the Center for Medicare and Medicaid Services, though at a lower frequency compared with a year earlier, and oil and gas companies are still feeling the effects of the depressed pricing environment, although E&P companies constitute a much larger share of energy filings this year than oilfield services companies.

The first half of this year included approximately 175 new chapter 11 cases spanning 51 court districts and a multitude of struggling industries. Compared with 2017’s first half, the first half of 2018 had significantly more cases in the consumer staples and technology sectors and far fewer cases in the financial (including real estate) and utilities sectors. Approximately 30% of filers in the first half of 2018 requested DIP financing in their first day pleadings, and roughly the same percentage filed in pursuit of an asset sale. Approximately 12% of cases over the period were commenced in the form of prepackaged chapter 11 filings, according to the Reorg First Day database.

Farmers and food distributors have been filing at a higher rate in 2018, with a 120% surge in farm chapter 11s this half compared with a year earlier. The bulk of the food distribution and farm filers have been in the cattle and sweet potato industries, which represent approximately 65% of the total. The consumer staples sector as a whole is up more than 100% with respect to chapter 11 cases over the period.

The first three firearms and ammunition manufacturers covered by Reorg First Day filed this year on the heels of Hillary Clinton’s surprise loss in the 2016 presidential race. The election upset sabotaged the high hopes of gun manufacturers, which had taken on debt to ramp up production under the expectation that the likely victory of Clinton would spur gun demand due to fear of stricter laws. After Clinton lost the election, gun demand sagged, saddling firearm distributors with debt and excess inventory in a market of tumbling prices.

Several notable media companies also filed for chapter 11 relief in the first half of this year, including the high-profile cases of The Weinstein Company and iHeartMedia, along with Relativity Media’s “chapter 22” and filings from Penthouse Magazine and two newspaper companies.

March was the busiest month of the year so far, with the greatest number of monthly chapter 11 filings in almost two years.

The level of monthly chapter 11 cases from January 2016 through the end of the first half of 2018 is shown below:
 
Broken down by sector, here’s how first-half 2018’s filings stack up against the first half of 2017:
 
Retail and energy filers make up over half of the year’s chapter 11 cases involving over $1 billion in liabilities, with oil and gas accounting for approximately 38% of billion-dollar cases and retail accounting for 19% (or 31% including grocery retailers).

The following shows aggregate debt for retail and energy chapter 11 filers from June 2015 through June 2018.
 
The first quarter of 2018 was the busiest first quarter in years for billion-dollar bankruptcies, with 14 cases filed with over $1 billion in debt. The first quarter’s billion-dollar cases were more than half the number for the entire year 2017, and close to half of all of 2016, making it the busiest first quarter for billion-dollar chapter 11s in at least seven years. The year’s largest case so far is broadcasting giant iHeart Media’s filing in March. iHeart reported more than $22 billion in liabilities and blamed the now-familiar woes of various forms of competition from the internet, digital advertising and the entry of on-demand streaming services.

The first half included 16 cases involving over $1 billion in liabilities, marking a 15% increase in billion-dollar chapter 11 filings from 2017’s first half. The chart below shows the difference between first-half 2017 and first-half 2018 in terms of billion-dollar cases, broken down by industry:
 
Delaware’s share of filings is up significantly this year with respect to cases reporting over $100 million in liabilities when compared with a year earlier. For the 12 months ended Dec. 31, 2017, the District of Delaware accounted for approximately 40% of cases involving liabilities in excess of $100 million. For the first half of 2018, that number has risen to 63%:
 
Retail

Coming off retail’s dominance in 2017, the sector was still a significant player in the first half of 2018, especially with grocery retailers, including supermarket chains such as Tops and Bi-Lo. Some of the typical reasons why retailers are filing include the decline in foot traffic and the high costs of running brick-and-mortar stores. E-commerce has also hit the grocers, but in different ways. Recent grocers that filed, such as Bi-Lo, blame Amazon, which has also plagued other retail companies. Clothing sellers and other retailers generally blame online shopping. Toy manufacturer Playhut’s May filing did not fit the typical mold of of recent retail industry filings, as Amazon is one of its customers. Playhut instead filed, among other reasons, because of the bankruptcy filing and March 2018 liquidation announcement of Toys “R” Us, its biggest customer.

Restaurants, on the other hand, usually blame the large competition from fast casual restaurants. Bertucci’s in particular complained that consumers’ preferences continue to shift toward cheaper, faster alternatives. Many of last year’s restaurant filers noted the same concerns as Bertucci’s regarding the casual dining industry. Garces Restaurant Group, owned by Jose Garces, a Food Network “Iron Chef” and James Beard award winner, did not blame industry factors for its filing but rather the closure of the Revel casino, which housed some of its restaurants, as well as minority shareholder insider litigation. Other restaurants, fast-food franchisees in particular, filed because of lease issues.

Below is a list of restaurant filings over the past 12 months:
 
There have also been several large fashion retailers such as Bon-Ton, Claire’s and Nine West, along with smaller chains such as A’GACI, Charlotte Olympia, The Walking Company, The Rockport Company and J. Mendel that have filed so far this year. After Nine West’s filing on April 9, reporting $1.9 billion in total liabilities, retail chain chapter 11 debt since June 2015 surpassed $25 billion. Footwear companies make up almost 30% of retail chapter 11 cases going as far back as 2016. A more general breakdown of retail filers over the period is as follows:
 
The month of May was particularly heavy with consumer discretionary cases, which accounted for about 45% of the month’s cases, up from its 2018 average of 26%. One of May’s filings was plant nursery business Color Spot, which was the fourth wholesale nursery business that Reorg First Day covered in the past two years and the second to report in excess of $100 million in liabilities. Color Spot, like a number of previous nursery filers, pointed to drought as a major factor behind its petition.

Energy

Notwithstanding a large amount of retail cases, the energy sector has accounted for more of the year’s large filings thus far, including five cases reporting over $1 billion in liabilities in the first quarter, compared with four billion-dollar retail filings. Energy sector cases are down from 2016’s oil and gas bankruptcy boom, but the first quarter of 2018 had more energy cases with over $1 billion in liabilities than in the first quarters of both 2016 and 2017.

Some of the large energy companies filing this year still point to the lingering effects of the late-2014 drop in oil and gas prices. Even though the prices have stabilized, they remain below their peak in 2008, particularly natural gas prices. These companies point to a drop in exploration and drilling projects or insufficient revenue leading to liquidity issues and an inability to service debt. Not all of the oil companies blamed commodity prices, though, as Philadelphia Energy Solutions, for example, blamed regulations, increased pipeline capacity and the unexpected lifting of a domestic crude oil exporting ban.

The number of energy cases has reached 17 year to date, of which more than 70% are E&P companies and 30% provide services, support and equipment to E&P companies. By comparison, E&P cases accounted for less than half of the energy sector’s cases in the first half of 2017, as shown below.
 
June was particularly busy with energy cases, clocking in at four cases, including an oil and gas services business, Geokinetics, two E&P companies - Flower Mound, Texas-based Fulcrum Exploration and Tulsa, Okla.-based Nichols Brothers - and an anthracite coal and carbon supplier, Lykens, Pa.-based Kimmel’s Coal and Packaging, each of which reported $10 million to $50 million in liabilities.

Merchant power also came into play in 2018’s first half, with FirstEnergy Solutions’ April bankruptcy filing. First Energy is among the more active and hotly watched cases in the distressed space, with its chapter 11 filings coming just three days after FirstEnergy notified PJM Interconnection, the regional transmission organization, that the company would deactivate or sell its three nuclear power plants during the next three years. FirstEnergy also recently called on U.S. Energy Secretary Rick Perry to issue an emergency order directing PJM to “immediately begin negotiations to secure the long-term capacity of certain nuclear and coal-fired plants in the region and to compensate their owners 'for the full benefits they provide to energy markets and the public at large, including fuel security and diversity.'" At issue for First Energy is its request for assistance under the Federal Power Act to protect faltering coal and nuclear power generation facilities. Other types of regulations, including zero-emissions credits for nuclear generators, have been a divisive issue among large merchant power players.

Consumer Staples

Supermarkets

A pair of large grocery chains filed at the beginning of this year: Tops Holdings, which at the time operated approximately 170 northeastern supermarkets, and Jacksonville, Fla.-based Southeastern Grocers, operator of southeastern conventional supermarkets under the Bi-Lo, Winn-Dixie, Harveys and Fresco y Más brand names. Southeastern Grocers filed a prepack to reduce its funded debt, contemplating closing underperforming stores and continuing to operate the remaining stores. Tops filed seeking approval of a DIP term loan that required entry into a restructuring support agreement with an hoc noteholder committee within 75 days of the petition date. Tops was the first supermarket chain to file with more than $1 billion in debt since The Great Atlantic & Pacific Tea Co.’s July 2015 filing.

Grocery stores have attributed their chapter 11 cases to food delivery companies and grocery stores that offer online ordering and delivery. Grocery stores have also been harmed by mega-retailers and specialty chains that sell food. In general, the grocery chains say that the food retail industry is very competitive. They also say that there has been a recent uptick in consumer demand for a gourmet shopping experience, as shoppers look for natural, organic and gluten-free foods. Some of the grocers also point to food deflation. Research by the U.S. Department of Agriculture shows that consumers paid less for grocery items in 2016 than in 2015, and it was the first time that food retail prices did not increase since 1967. Some chains, such as Central Grocers and Marsh Supermarkets, filed after not being able to keep up with capital improvements being made by their competitors.

Farms

A corollary to the grocery filings are farm filings, which have been on the rise so far this year, bringing the number of cases in the industry covered by Reorg First Day to 13 in 2018, more than tripling the number of farm cases filed over the same period last year. Food distributors that serve as the link between farms and supermarkets have also succumbed to bankruptcy, as the first half of this year included filings from food distributors such as Sunshine Dairy Foods Management and Southern Produce Distributors, as well as May’s filing by Central Grocers, the seventh-largest food co-op and distributor in the U.S.

The influx of farm filers has left the consumer staples sector with an approximately 120% surge in cases this year. According to a May 16 story by The Fence Post, year-over-year increases in chapter 12 filings, which are designed for family farmers, range from 63% to 108% in certain types of farms. “From the northeast, into the western Corn Belt and upper midwest, down into the southwest and into the west, farm bankruptcies are higher than year-ago levels,” the article says, explaining that bankruptcy levels in these areas “are likely attributable to continued declines in cash receipts for dairy, wheat, corn and cotton, as projected by the U.S. Department of Agriculture.” The debtors that have filed chapter 11 cases include a concentration of cattle and potato farmers.

Following is a breakdown of consumer staples cases in the first half of 2017 as compared with the first half of 2018:
 
Healthcare

Healthcare filings trended upward throughout the first half of this year, amounting to a total of 9% of the period’s cases, compared with approximately 8% of all cases in 2017. In the first half of this year, March was a very busy month for healthcare cases, which accounted for about 25% of the cases for the month, as compared with about 8% for all of 2017. HCR ManorCare, which operates long-term care, hospice and rehab facilities throughout the country, was the largest one to file. HCR filed as a prepack with votes in before the filing, all voting to accept, and it cited decreased revenue from its long-term care business because of what it said was a challenging business environment. Behavioral health services and residential drug and alcohol addiction treatment provider Elements Behavioral Health, which sought chapter 11 protection at the end of May, similarly blamed waning insurance provider reimbursement rates. In general, though, many hospital operators are struggling with rising uninsureds, increased patient bad debt and decreasing Medicare and Medicaid reimbursements.

Most of the hospitals seek to sell their assets or partner with a larger hospital network. Industry filers from this period seeking to run 363 sales include Sancilio Pharmaceuticals Co., rehab provider Elements Behavioral Health and biomarker manufacturer ABT Molecular Imaging, the former two of which have stalking horse bidders in hand. Medizone International, subject of a involuntary petition filed in April, subsequently filed its own chapter 7 case, in which the trustee is also seeking to sell assets, with Medizone’s former CEO and his wife looking to serve as collectively as the stalking horse bidder for a $500,000 cash bid.

Media

Numerous media companies went into chapter 11 during the year’s first half, some representing media platforms that continue to struggle against increasingly digitized consumption patterns.

The largest media case this year, which is also the biggest case of the year with respect to debt for all industries, is iHeartMedia - the only case so far in 2018 to report over $10 billion in liabilities. The radio broadcasting and advertising company’s liquidity troubles began several years ago on the heels of missed earnings estimates. Formerly known as Clear Channel Communications, iHeart owned and operated 849 radio stations prepetition and reported $20.3 billion in liabilities as of the petition date. The company secured $3.6 billion in revenue last year against cash interest payments of $1.4 billion with respect to its $16 billion in funded debt.

Another high-profile media chapter 11 filing came from film production studio The Weinstein Company, whose filing follows publicity surrounding a multitude of allegations of sexual abuse committed by the company’s owner, Harvey Weinstein. Weinstein’s bankruptcy followed a failed sale effort between the company and an investor group led by Maria Contreras-Sweet and Ron Burkle, who walked away from the purchase after learning “new information about the Company’s financial condition,” which the debtors dismissed as “just … an excuse.” After the publication of a New York Times story that detailed allegations against Harvey Weinstein, numerous business partners of the production company axed their relationships with Weinstein, including Amazon, Apple, Netflix, Channing Tatum and Lexus.

Relativity Media’s May 3 filing marked its second bankruptcy in just over two years, after it failed to secure the necessary debt or equity capital to execute its post-reorganization business plan upon emergence from the first chapter 11 case about a year ago. Relativity reports $325 million in liabilities and filed the case in pursuit of a sale of its assets to UltraV JV, a joint venture of funds managed by Sound Point Capital Management and RMRM Holdings. The same week as Relativity’s “chapter 22,” media advertising services company Videology filed, blaming the downturn of its legacy media sales business, tough competition and slow sales cycles.

After the Boston Herald filed chapter 11 toward the end of 2017, printed media companies Penthouse Global Media and the Daily Gazette Co., which runs the Charleston Gazette-Mail newspaper, also filed. Penthouse has faced hurdles in recent years as the print advertising industry has declined and as adult entertainment has migrated to the web. The owners of the Charleston Gazette-Mail attributed the filing “a challenging print advertising environment over the past several years at both the local and national level.” The owner of the Charleston Gazette-Mail was the third newspaper company within six months to file seeking a sale, after the Boston Herald and Alaska Dispatch News.