2020: The Year of Bankruptcies
Even the Fortune 500 aren’t safe from COVID-19
“We’re gonna see more bankruptcies in a year than in a businessperson’s entire lifetime.”
That’s what James Hammond, the CEO of New Generation Research, who runs BankruptcyData, predicts.
The worldwide economic impact of the COVID-19 pandemic has left virtually no one unscathed, even those on the acclaimed Fortune 500 list. It’s hardly surprising to see announcements of companies filing for bankruptcy gracing the headlines of business news portals these days.
However, it doesn’t mean that these companies who have filed for bankruptcy are ceasing all operations, and you’ll probably still see some of them around, business carrying on like normal.
That’s because bankruptcy doesn’t equate to going out of business.
Besides, these companies have filed for a specific type of bankruptcy protection: Chapter 11 of the United States Bankruptcy Code.
Image via Renan Kamikoga
What Chapter 11 bankruptcy means
Malaysia doesn’t have such a concept, but it’s important to note that Chapter 11 isn’t the end. According to Investopedia, it simply means reorganizing funds, debts, and assets in order to restructure debt — essentially, giving the debtor an opportunity to press the “reset” button and give the company a fresh start. This gives them a chance to reconstruct their plans and stay afloat, instead of liquidating and dissolving the entire company. It also allows them to continue doing business without shutting down completely.
Some of the big names who have filed for bankruptcy protection include:
- Brooks Brothers
The US’s oldest clothier, which has lasted for two hundred and two years and is best known for its suits, had to seek court protection against creditors while it currently looks for a buyer. They have also had to shut down 3 of their factories and 51 of their stores in the US.
- Cirque du Soleil
The world’s largest and most renowned contemporary circus has filed for Chapter 15 bankruptcy protection (an international version of Chapter 11). As a result of the pandemic, they were forced to close and suspend all shows for the unforeseeable future. With zero revenue and nearly $1 billion in debt, the circus has laid off 3500 of its employees.
The High Street fashion giant has entered administration, UK’s version of Chapter 11, and is preparing to file for bankruptcy if they fail to secure a rescue deal. The government’s furlough scheme is helping to pay the majority of its 22,000 employees as the company is £600 million in debt.
You might be surprised to find that this health and wellness retail store was not spared either. Mainly selling products such as vitamins, dietary and nutritional supplements, GNC will be closing up to 1200 outlets in the US as the coronavirus pandemic continues.
As the US's second largest car rental service and a Fortune 500 company, Hertz is the biggest bankruptcy amidst the COVID-19 pandemic. Racking up more than $24 billion in debt and losing all revenue by mid-March, the company filed for bankruptcy on May 22 and put thousands of their rental cars up for sale.
- Hin Leong
One of Asia’s top oil traders, this Singaporean independent corporation owes some $3.85 billion in debt and has filed for bankruptcy protection. PricewaterhouseCoopers (PwC) will be overseeing the restructuring of their debts, the biggest being to banks HSBC ($600 million), UOB ($100 million), OCBC ($200 million) and DBS Bank ($290 million).
- J.C. Penney
One of US’s largest and most prominent departmental stores, also listed on the Fortune 500, filed for Chapter 11 bankruptcy as well, adding to the growing list of companies unable to deal with the blow of the pandemic. They are planning to close 242 out of their 845 locations as they have incurred a debt of $4.2 billion.
- LATAM Airlines
South America’s biggest airline and the world’s largest airline to seek bankruptcy protection to date, seeks to reorganize their $18 billion debt. The subsidiaries involved in the restructuring process include Brazil, Chile, Colombia, Ecuador, Peru, the Cayman Islands, the US, and the Netherlands. Meanwhile, the Argentina branch will be closed, while LATAM Airlines Paraguay is the only one who remains untouched.
Why are so many companies filing for bankruptcy?
We’ve analysed what these companies have in common and determined the reasons as to why they’ve been forced to do so:
1. They were already struggling prior to COVID-19
Image via Markus Winkler
COVID-19 was just putting the nail in the coffin. If we take a closer look, most of these companies were already on the verge of collapsing even before the pandemic happened. For example, this is Debenhams third time going into administration within a year, while Brooks Brothers, J.C. Penney and GNC outlets too were facing losses. With constant fierce competition and developing technology, it was just a matter of time and a bad situation before they finally fell.
2. Changes in consumer behaviour
Image via Frank Busch
With the threat of the virus out there, consumer behaviour has shifted to reflect the lifestyle changes we have had to make in order to adapt and abide by the new social rules of society, and experts predict that they're going to be permanent as we venture into a post-COVID-19 world. Unemployment is a big issue as well, and a survey by McKinsey & Company revealed that most of people’s spending is focused on groceries and other necessities; spending on anything other than what is deemed crucial will be cut back. The fear of going out and leaving the safety of our homes has also created a serious decline in retail shopping as people opt for online shopping instead.
3. Nature of industry
Image via chuttersnap
Sadly, there’s only so much some industries can adapt to. With travel being an immediate cross off the list and the sudden jump to e-commerce due to the need for social distancing, it’s no wonder that retail and transportation are included in the list of industries with the most bankruptcy filings this year, according to Fortune.
As you can see, these industries either mostly rely on physical human presence, interaction and communication (you can’t possibly build buildings from your bedroom!), or there simply was no demand for it anymore. In the case of GNC, the switch to purchasing health supplements online crushed all hopes of resuscitating the business of their retail stores. Meanwhile, for Hin Leong, oil and gas prices dropped drastically as the need for transportation reduced significantly.
It’s clearer than ever how times can change at the snap of a finger, and businesses have to be more than ready to adapt to those changes as they can happen anytime. To do so, we have to continually be up to date with the times and be prepared for any complications thrown our way. It shouldn’t take a pandemic for us to change our ways. After all, customer is king — businesses are made to serve, and deliver we must.