One month ago, when showing the uncanny correlation between defaults and the unemployment rates, we predicted that the number of Chapter 11 filings that is about to flood the US will be nothing short of biblical.
All that was missing was a catalyst, one which according to Bloomberg arrived in late May as retail landlords started sending out thousands of default notices to tenants, who in turn experienced a collapse in foot traffic, sales and cash flow due to the COVID-19 pandemic, and were simply unable to pay their debt obligations.
According to Bloomberg, restaurants, department stores, apparel merchants and specialty chains have been receiving notices from landlords - some of whom have gone as long as three months without receiving rent.
"The default letters from landlords are flying out the door," said Andy Graiser, co-president of commercial real estate company, A&G Real Estate Partners. "It’s creating a real fear in the marketplace."
Pressure from default notices and follow-up actions like locking up stores or terminating leases was cited in the bankruptcies of Modell’s Sporting Goods and Stage Stores Inc. Many chains stopped paying rent after the pandemic shuttered most U.S. stores, gambling that they could hold on to some cash before landlords demanded payment.
An estimated $7.4 billion in rent for April hasn’t been paid (May numbers have yet to be released), or about 45% of what’s owed, according to a recent analysis by CoStar Group, which also found that just a quarter of of expected rent payments have been received by landlords.
Last Thursday, these anecdotal reports were confirmed by the American Bankruptcy Institute which announced that as expected, corporate bankruptcies soared during May, pushing the number of filings to levels recorded in the wake of the 2007-09 recession. According to figures from legal-services firm Epiq Global, US bankruptcy courts recorded 722 businesses nationwide filing for chapter 11 protection last month, a yearly increase of 48% from 487 businesses in May of 2019. The surge was also seen on a month-over-month basis, which jumped by 28% from the 562 Chapter 11 filings in April.
In addition to numerous small and medium business, several iconic companies also filed for bankruptcy last month, including retailers J.C. Penney, Neiman Marcus and J.Crew along with the management company behind two leading Lasik surgery brands, the U.S. division of Le Pain Quotidien, Gold’s Gym and drugmaker Akorn.
According to a separate freport from Bloomberg, in May alone, some 27 companies reporting at least $50 million in liabilities sought court protection from creditors - the highest number since the Great Recession.
Deborah Williamson, a San Antonio bankruptcy lawyer with Dykema Gossett PLLC, said that some of the business she has seen indicates more work in the future, Ms. Williamson said, even though some state and local governments have begun to relax stay-at-home orders that kept nonessential businesses closed and consumers out of brick-and-mortar stores.
"Hotels are not going to bounce back quickly. You’re going to see a long-term effect on office space," she told the Journal. "The consequence of the quarantine around the world…It’s not going to magically go away as you reopen."
Bankruptcy lawyer James Conlan of Faegre Drinker Biddle & Reath said his group kept busy during May with work across a range of sectors, including energy, airlines, aircraft lessors, real estate, top automotive suppliers, hospitality and retail.
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