WeWork CEO Sandeep Mathrani (Wikipedia, iStock)

In April, a Manhattan landlord who leases a large space to WeWork received an email from a broker who was working on behalf of the struggling co-working company to renegotiate its office leases.

I told him politely its not happening, so dont waste your time, the landlord said, noting that because his lease with WeWork is below market-rent, hes comfortable taking the space back. Im going to play hardball.

Brokers at Newmark Knight Frank and JLL have spent the last several weeks reaching out to WeWorks landlords trying to negotiate concessions on billions of dollars of leases that threaten the companys cash flows.

WeWork had $47.2 billion worth of lease obligations on its books as of late last year, and is reportedly looking to reduce those rent liabilities by 30 percent.

Now as Covid-19 puts further pressure on the co-working companys bottom line, critics are raising questions about whether its business model of packing a rotating cast of strangers into tight spaces can survive in a world of social distancing and contact tracing.

That raises the stakes for WeWorks lease negotiations, according to those who believe this could be a make-or-break scenario for the Softbank-backed company once valued at as much as $47 billion before its failed IPO last year. WeWork was recently valued at just under $3 billion, Bloomberg reported in May.

WeWorks critics have long speculated that the company could be forced to file for bankruptcy in a downturn. If that happened, WeWork would have several scenarios laid out in front of it, experts told The Real Deal.

Landlords arent always willing to make concessions outside of bankruptcy, said Timothy Duggan, an attorney at the Stark & Stark in New Jersey who represented office equipment provider Transamerica as a creditor when Regus another large flex-office company filed for bankruptcy in 2003.

But that dynamic often changes once under Chapter 11.

If Im a landlord and I know a bunch of other landlords are making concessions and I have a shot of coming out of bankruptcy, I might be more willing to make a deal, Duggan noted.

Still, under the protection of bankruptcy the companys core challenge would be the same: It still has to convince its creditors that it has a viable plan to turn things around.

Even in bankruptcy, they still have to get people to believe they can come out of this, Duggan added. Its all still one big negotiation.

WeWork had $1.3 billion of long-term debt when it issued its prospectus last year, including credit agreements with JPMorgan and $669 million in corporate bonds. Those bonds were trading for as low as 28 cents on the dollar in May.

Even in bankruptcy, they still have to get people to believe they can come out of this.Timothy Duggan, Stark & Stark

Mathrani joined WeWork earlier this year to help right the ship after its co-founder Adam Neumann was ousted following the IPO debacle.

He is a proven leader with turnaround expertise in the real estate industry, SoftBanks Raul Marcelo Claure, the former interim chairman of WeWork, said about Mathrani in a February statement.

To be clear, WeWork has made no public plans to file for bankruptcy, and that option is by no means an inevitability.

A spokesperson for the company told TRDthat WeWork has a strong financial position with $3.9 billion in cash and commitments that provides us the liquidity to weather this current climate while also executing on our five-year plan and investing in our future.

We continue to rightsize our portfolio by exiting locations that are unprofitable, growing in markets where we see enterprise demand, the spokesperson added, noting WeWork is planning to open more than 60 new locations through early 2021 and is investing $100 million in WeWork India.

But the companys critics have long speculated that WeWork could end up in bankruptcy, particularly during an economic downturn.

The company has laid off thousands of employees since November. Softbank backed out of a financial bailout and IBM is reportedly ready to walk from its WeWork space at 88 University Place one of the first locations in the co-working companys pivot to an enterprise model.

Softbank last month took another writedown on its WeWork investment, saying it expects to take a $6.6 billion loss for the year on the portion of the firms stake held outside of its $100 billion Vision Fund.

Every writedown takes Weworks carrying value closer to reality, Redex Holdings analyst Kirk Boodry opined in Reuters. Clearly the value is zero.

Softbank CEO Masayoshi Son said in April that he expects a significant portion of the 88 companies backed by more than $80 billion in venture capital from the first Vision Fund to end up in bankruptcy.

I would say 15 of them will go bankrupt, Son predicted, adding that he expects another 15 of the funds bets to prosper.

WeWork chairman Marcelo Claure, though, sought to distance his company from those remarks.

Make no mistake: SoftBanks Masayoshi Son and myself are huge believers in the new WeWork and its management team, we will continue to support the company, he Tweeted in May. We have no doubt that WeWork will emerge from COVID19 stronger than ever and are committed to profitability by 2021.

Mathrani said WeWork paid rent at 80 percent of its locations in April and May and that it collected rent from 70 percent of its members. Its difficult to gauge whether or not the Newmark and JLL brokers have been successful in negotiating the necessary concessions from building owners.

Representatives for Newmark and JLL did not respond to requests for comment.

WeWork may be able to avoid the bankruptcy route thanks to a number of leases that are reportedly held by subsidiaries with limited parent guarantees. That means WeWork could walk away from individual leases without triggering liability back to its parent company.

But if it came to a bankruptcy situation, experts laid out several scenarios.

In Chapter 11 a tenant usually makes a binary decision on leases: It either accepts the lease or rejects each deal. Landlords who hold rejected leases get to file a claim as an unsecured creditor and divvy up whatevers left over after the restructuring plan. They usually end up accepting pennies on the dollar for their agreements.

WeWork could have options other than up or down on leases, and the Regus case could provide a blueprint.

Duggan said that Regus got permission from the court to take a second shot at renegotiating its leases during bankruptcy, and the flex-office company was successful in reworking about 70 deals. The benefit of doing it that way, he added, is that landlords are more likely to see it as their last shot at coming away with a more favorable outcome.

The problem outside bankruptcy is, sometimes the landlords dont believe the company is going to file, Duggan said.

If WeWork were to file, though, Duggan explained the company could then go to their landlords with more leverage. Now [WeWork] can say, Heres proof; Were in Chapter 11, he said.

Even if it were to play out that way, Mathrani and his team would still have to convince WeWorks largest landlords that it could come out of restructuring with a successful plan, according to sources.

Bankruptcy experts say that in Chapter 11, a committee of unsecured creditors made up mostly of WeWorks largest landlords would play a significant role in approving or shooting down a restructuring plan.

The institutional landlords are really going to decide whether they believe in the plan or not, said one attorney who spoke on the condition of anonymity because he represents one of WeWorks landlords.

Its really hard to see WeWork coming out of this if they do file, the attorney added. In order for the company to be reorganized, its creditors have to be confident that management can execute.

WeWorks five biggest landlords around the country, as of last summer, were Beacon Capital Partners, Nuveen Real Estate, the Moinian Group, Boston Properties and the Chetrit Group, according to data from Costar Group. A spokesperson for Beacon Capital declined to comment, and representatives for Moinian, Boston Properties and the Chetrit Group did not respond to requests for comment.

Chad Phillips, head of Nuveens Americas office portfolio, pointed out that the company only has 2 percent of its space exposed to WeWork. He added the investment manager believes demand for flexible office space will increase post-Covid as large office tenants move to a hub-and-spoke model.

That said, flexible operators will need to evolve their business models and modify their formats with less density and more company control over their spaces, he said, adding that stronger operators who can pivot in light of the pandemic stand to gain market share in the flex office space.

As observers watch closely, some are planning for a fallout from WeWorks big push to reorganize.

Theres not enough demand to support the scale of what they have. In some buildings they have 300,000 square feet when in reality they might want 60,000 square feet. Ryan Simonetti, Convene

He said Convene which leases meeting rooms and other workspaces on a short-term basis is considering signing its own lease deals for some of the spaces or partnering with landlords to manage them.

Were looking at what would it take to reconfigure a WeWork location to a Convene offering? Simonetti noted. Theres not enough demand to support the scale of what they have. In some buildings they have 300,000 square feet when in reality they might want 60,000 square feet.

In the most extreme scenario, WeWork would fail to convince its creditors of a successful path forward. In that case, liquidation may be the only option.

Theres no magic bullet here, said attorney Hugh Ray, head of the bankruptcy practice at the trial firm McKool Smith.

In some cases, Chapter 11 is a wonderful thing, he added. When it works, its wonderful to see. But it doesnt work for everyone.

Contact Rich Bockmann at [emailprotected] or 908-415-5229

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What would a WeWork bankruptcy look like? - The Real Deal

By Edward Morrison, Andrea Okie and Kerri Leonhardt

Law360 is providing free access to its coronavirus coverage to make sure all members of the legal community have accurate information in this time of uncertainty and change. Use the form below to sign up for any of our daily newsletters. Signing up for any of our section newsletters will opt you in to the daily Coronavirus briefing.

Law360 (June 9, 2020, 12:44 PM EDT) --

For the vast majority of all industries, COVID-19 seems likely to inflict long-term damage. U.S. gross domestic product is expected to fall by at least 30%, on an annualized basis, during the second quarter of 2020.[2] Even if the pandemic eases after June 2020, experts predict a partial recovery, at best, in 2021.[3]

The COVID-19 fallout also seems likely to reverberate through our bankruptcy courts. We already have started to witness the first signs, with Chapter 11 filings by hospital operators, like Quorum Health Corp.; restaurants, like FoodFirst Global Restaurants Inc.; gyms, like Gold's Gym International Inc.; car rental companies, like Hertz Corp.; smaller airlines, like Ravn Air Group; communications providers, like Frontier Communications Corp. and Intelsat Corp.; and major retailers, like J.Crew Group Inc., J.C. Penney Co. and Neiman Marcus Group.[4]

These filings are likely the beginning swell of the wave. The coming months may see filings beyond the corporate sector as municipalities and other government instrumentalities face severe financial pressure due to declining tax revenues and increasing expenditures in the face of the pandemic.

Valuation will be the flashpoint in many of the corporate restructurings ahead. A firm's ability to negotiate a quick restructuring, especially a prepackaged bankruptcy; obtain financing during the restructuring process; obtain consent to a restructuring plan that imposes haircuts on lenders; and avoid a costly fight to "cram down" a restructuring plan that lenders dislike depends critically on the firm's estimated going-concern value and, equally importantly, the range of disagreement over that valuation.

This is true in any Chapter 11 case, but it is especially problematic during the current crisis, which has rendered all but the most predictable future cash flows uncertain. Put simply, how do you restructure claims against cash flows in an environment where you have little visibility on what cash flows will look like going forward?

One reason why valuation is likely to prove particularly complex in the current environment is that many prospective filers will have entered the crisis with preexisting weaknesses. Some became overlevered during a record-setting decade of corporate borrowing. Others were so weak operationally and financially that they had become corporate "zombies," lumbering through multiple years when their earnings were insufficient to cover interest expenses.

But not all businesses had preexisting conditions. Some "shocked-but-sound" businesses had bright futures that were destabilized by the current crisis. Those bright futures may still exist, provided economic activity stabilizes. Indeed, these businesses may not be insolvent in the long run; they just have short-run cash flow problems. Such businesses present very different valuation issues than the firms that entered the crisis with already-disabling financial and operational problems.

This article has two goals: (1) to calibrate the importance of these three categories of companies shocked-but-sound, overlevered and zombies for bankruptcy cases in the near term; and (2) to identify the critical valuation questions that will loom large in a COVID-19 world and examine how these valuation questions will vary by company category.

Category 1: Shocked-But-Sound

COVID-19 has triggered a short-term liquidity crisis for many firms that had modest leverage prior to the crisis but are now experiencing sharp declines in revenue. Because many of these firms may be unable to pay key short-term obligations as they come due, they may be forced to seek relief in Chapter 11 bankruptcy.

To get a sense of how many publicly traded firms fall into this shocked-but-sound category, we calculated the market leverage ratio for all nonfinancial[5] firms in the Russell 3000 as of December 2019.[6] We then identified the leverage ratio that distinguishes the top 10% of firms from the bottom 90%. We view this threshold as a proxy to identify firms with the highest market leverage.

Finally, we identified firms that were below this threshold in December 2019, but above it as of May 2020.

These shocked-but-sound firms had comfortable leverage ratios prior to the pandemic, but now find themselves among the firms with the highest level of market leverage in their industry because investors have suddenly devalued the firms' equity.

Figure 1 shows what we find, with results broken out by industry. We show the percentage of firms within each industry that have seen their market leverage ratios jump above the 90th percentile (or 75th percentile).

Unsurprisingly, the largest impacts are being felt in consumer retail consumer discretionary and the energy sector, where 13% and 18% of firms, respectively, have seen a jump in their leverage ratios. The former has been hit hard by social distancing; an oil glut is hammering the latter.

But many other industries have seen nearly 10% of firms experience a spike in leverage ratios, including industrials which includes the transportation sector, communication services, utilities and consumer staples. It seems highly likely that these industries will be well-represented in bankruptcy courts.

Figure 1: Shocked-But-Sound Firms by Sector as of May[7]

Category 2: Overlevered

Many firms were financially fragile before the advent of COVID-19. They had taken on high levels of debt during the past decade, which some have dubbed a corporate debt bubble. These overlevered firms were in striking distance of insolvency prior to the crisis and have now been plunged into that category.

Whereas shocked-but-sound firms are suffering a liquidity crisis, overlevered firms are suffering a solvency crisis, with liabilities now exceeding assets. They are the prototypical candidates for Chapter 11 restructuring, because they need an overhaul of their balance sheets.

In Figure 2, we provide a rough estimate, by industry, of how many firms fall within the overlevered category in 2013, a year intended to represent a post-Great Recession baseline, and 2019.

Focusing on nonfinancial, publicly traded firms in the Russell 3000, we calculate the net debt to earnings before interest, taxes, depreciation and amortization, or EBITDA, ratio[8] for all firms and plot the percentage of firms with a ratio greater than six.

We chose this 6-1 ratio because market actors have assumed that regulators view ratios above this level as red flags.[9] It is also the threshold applied by the Federal Reserve's Main Street Expanded Loan Facility Program.[10]

As shown in Figure 2, some sectors, especially health care and information technology, saw large increases in the proportion of overlevered firms during the past decade. Notably these two sectors had the lowest percentage of firms falling in the shocked-but-sound category, suggesting that these may be industries where leverage is high, but investors still expect strong demand for services going forward which explains why equity values have not plummeted enough to send many firms into the shocked-but-sound category.

Nevertheless, in these two industries, as well as communication services, approximately 20% or more of firms were overlevered as they entered the COVID-19 crisis. Absent aggressive out-of-court restructurings, we expect to see many of these overlevered firms land in our bankruptcy system in the months ahead.

Figure 2: Overlevered Firms in 2013 and 2019

Category 3: Zombies

Financial crises in other parts of the world, especially Japan, have drawn attention to zombie firms that have insufficient cash flows to service their debt, but survive for years because lenders offer forbearance a form of life support for the zombies.[11] Perhaps surprisingly, there are many zombies in the U.S. today.

Using the definition applied by the Bank of International Settlements,[12] which calls a firm a zombie if it is at least 10 years old and has a ratio of earnings before interest and taxes, or EBIT, to interest expense that is below one, we see in Figure 3 that zombies are prevalent in all industries.

In this figure, we identify two kinds of zombies as of 2019: (1) long-term zombies (firms with EBIT below interest expense throughout 2017-2019), and (2) all zombies (these firms may not have been zombies in previous years).

What is surprising is that long-term zombies account for a large fraction ranging from 18% to 29% of firms in the health care, information technology, energy and communication services industries. If we look exclusively at 2019 data, zombies account for 40% of all firms in both the health care and energy sectors.

Figure 3: Zombie Firms

Implications for Valuation in Bankruptcy

Each category shocked-but-sound, overlevered and zombies raises distinct valuation questions in a Chapter 11 case. Across all categories, however, COVID-19 raises common valuation challenges. We start first with these common challenges and then turn to category-specific issues.

The building blocks for valuation are (1) estimated free cash flows, and (2) the cost of capital. This is true whether the valuation is done inside or outside of a crisis, and whether it is done inside or outside of bankruptcy. What is different during this crisis is the uncertainty surrounding these building blocks.

What is different in bankruptcy is that the investor waterfall senior creditors, junior creditors and shareholders often erupts into sharp disagreements about how to measure these building blocks. These disagreements are resolved by bankruptcy judges who typically have little to no ability to conduct their own, independent valuations.[13]

Put differently, the uncertainties that exist outside of bankruptcy, which are large in the current crisis, are magnified in bankruptcy as investors fight to increase their recoveries. These fights are costly and often frustrating for judges who frequently see two experts reach wildly different estimates using the same methodology. These fights can be moderated by focusing on the right issues.

Cash Flows

How long will it take to reach pre-COVID-19 cash flow levels, if they ever return? Every valuation model needs to explore alternative pathways for future cash flows. Macroeconomists are unsure whether the recovery will be swoosh-shaped, V-shaped, U-shaped, W-shaped or some even worse shape. Those macro possibilities need to be part of a valuation.

Equally important, the shape of the recovery for a particular firm will depend critically on the extent to which its operations rely on labor inputs, which will be difficult to manage with continued social distancing, as well as the extent to which its products or services can be delivered without substantial human contact, which will be very difficult for service industries, including restaurants, entertainment, hotels and airlines.

Relatedly, the pathway to recovery for a firm will depend on upstream and downstream developments as well as changes in the competitive environment. Upstream, firms may find that supply chains have been disrupted by COVID-19. This will be particularly true for businesses that rely on inputs sourced abroad.

Downstream, firms may find that demand for their products has shrunk as consumer incomes have fallen (e.g., travel and leisure is one adversely affected sector). More importantly, this period of social isolation may have permanently changed some consumption patterns (e.g., telemedicine).

Finally, some firms will find that competitors have shrunk or disappeared, while others may find that their competitors are adapting more quickly to the changed environment by, for example, investing in labor-saving technology.

Cost of Capital

The flashpoint in a surprisingly large percentage of bankruptcy valuations is the weighted average cost of capital, or WACC, used as the discount rate, not the projected free cash flows.[14] Experts are much more likely to challenge each other's estimates of the WACC, including inputs such as the cost of equity and beta, than they are to challenge the projected cash flows, which were often prepared by the firm's own managers.

What is surprising about this is that calculating a firm's WACC has well-established theoretical foundations and requires well-understood inputs: cost of equity, cost of debt and capital structure weights.

To be sure, each input is highly contestable and requires assumptions about what, for example, the firm's capital structure will look like in the years ahead.

But where this can go off-the-rails is when experts depart from established theoretical foundations and build up discount rates using methods that are grounded in intuition, not theory or data.[15] That is particularly problematic because the level of uncertainty surrounding the current COVID-19 crisis makes it hard enough to accurately estimate the few inputs needed to calculate the WACC without injecting untestable intuitions into the calculations.

The WACC flashpoint is especially intense when a firm proposes either a reorganization plan or a going-concern sale. In these cases, a valuation expert is often tasked with estimating the cost of equity going forward.

The cost of equity measures the rate of return that shareholders will demand based on the riskiness of future cash flows and the firm's expected capital structure. It is often estimated using either the capital asset pricing model or the Fama-French model.

Regardless of model, the valuation expert generally needs to estimate the risk-free rate usually taken from long-term U.S. Department of the Treasury bonds, the equity risk premium the spread between the return on a well-diversified portfolio such as the S&P 500 and the risk-free rate, and the firm's beta a measure of the firm's risk relative to the broader market.

These three inputs risk-free rate, equity risk premium and beta will present special challenges during the current crisis.

How should we measure the risk-free rate during a crisis as investors flock to treasuries, depressing yields? How should we measure the market risk premium when current conditions raise doubts about the relevance of historical averages? How do we gauge the sensitivity of a firm's equity returns to overall market risk (i.e., its beta) when that sensitivity is changing over time and historical estimates are likely to be highly noisy?

To illustrate, equity returns for some firms (e.g., McDonald's Corp.) were relatively insensitive to the previous financial crisis and such firms had betas substantially below one prior to the COVID-19 crisis. During the current crisis, however, it seems that many of these firms are much more sensitive to systematic risk than previous beta estimates suggest.

While the current environment puts these issues in stark relief, they are actually questions that have been studied by financial economists for many years. Strategies proposed by these economists perhaps including shrinkage estimators[16] could be considered when estimating the expected return to equity.

Although these building blocks cash flows and cost of capital are often the focus in bankruptcy valuations, each company will present special firm-specific issues that must be factored into a valuation inquiry.

And while any one firm may not fit neatly, or even exclusively, into one of our three categories of firms shocked-but-sound, overlevered, or zombie each category raises special valuation challenges:

Conclusion

The months ahead are likely to unveil an unprecedented wave of Chapter 11 filings by many corporations. Some will fit the profile of the prototypical case the overlevered firm; others will be pushed into bankruptcy after avoiding it for many years due to lender life support the zombies. But a substantial number may be healthy firms facing a liquidity crisis the shocked-but-sound.

Although each firm will present distinct valuation challenges, and each may require special tools, such as warrants, to resolve valuation disputes, we believe that these valuation challenges can be overcome by focusing on the bedrock tools of valuation, relying on well-accepted methodologies that have a basis in theory and evidence, and identifying precisely the environmental changes occurring in the current environment. Even in a crisis, valuation can be tractable, provided we focus on the right questions.

Andrea Okie is a vice president and Kerri Leonhardt is a manager at Analysis Group.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the organization, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Remarks of Warren Buffett at 2020 annual shareholder meeting of Berkshire Hathaway.

[2] "The U.S. Economy Contracted by the Most Since the 2008 Recession," The New York Times, April 29, 2020.

[3] Greg Robb, "IMF sees 'partial rebound' in global economy in 2021 after worst downturn since 1930s, Georgieva says," MarketWatch, April 9, 2020.

[4] Jeremy Hill and Rick Green, "Quorum Hospital Chain Seeks Bankruptcy Amid Covid Onslaught (3)," Bloomberg Law, April 7, 2020. Peter Romeo, "Brio and Bravo Parent Files for Chapter 11 Bankruptcy After Closing 71 Units," Restaurant Business Online, April 11, 2020. Jonathan Randles, "Gold's Gym Files for Chapter 11 to Withstand Coronavirus Pandemic," The Wall Street Journal, May 4, 2020. Chris Isidore, "Hertz files for bankruptcy," CNN, May 24, 2020. Yereth Rosen, "Alaska's RavnAir May Face Bankruptcy Fight Over Jets Grounded by Coronavirus," Reuters, April 7, 2020. Jonathan Randles and Colin Kellaher, "Frontier Communications Files for Chapter 11 Bankruptcy," The Wall Street Journal, April 15, 2020. Rama Venkat, "Intelsat files for Chapter 11 bankruptcy," Reuters, May 14, 2020. Mary Hanbury, "Neiman Marcus, J. Crew, and True Religion are among the first US retailers to file for bankruptcy," Business Insider, May 7, 2020. Sapna Maheshwari and Michael Corkery, "J.C. Penney, 118-Year-Old Department Store, Files for Bankruptcy," The New York Times, May 15, 2020.

[5] We exclude firms categorized in the financial and real estate sectors.

[6] By "market leverage," we mean the ratio of net debt (debt minus cash) to market capitalization. See note [8].

[7] Firms classified as transportation are included in the industrials sector.

[8] Net debt is calculated as long-term debt plus short-term debt less cash and cash equivalents. EBITDA is a firm's earnings before interest, taxes, depreciation, and amortization expenses for the trailing year. All data are from S&P Capital IQ. For the purposes of this analysis, firms with incomplete data (EBITDA and/or net debt) are excluded, firms with negative net debt (i.e., with cash and cash equivalents greater than total debt) are not considered "over-levered," and firms with negative EBITDA are considered "over-levered."

[9] See, e.g., Ann Richardson Knox, "Leveraged Loan Regulatory Uncertainty Presents Opportunities for Direct Loan Funds," newsletter published by Mayer Brown.

[10] The program's term sheet, available here, includes the following language with respect to the amount of the loan, "an amount that, when added to the Eligible Borrower's existing outstanding and undrawn available debt, does not exceed six times the Eligible Borrower's adjusted 2019 earnings before interest, taxes, depreciation, and amortization ('EBITDA')."

[11] See, e.g., Ricardo J. Caballero, Takeo Hoshi, and Anil K. Kashyap, "Zombie Lending and Depressed Restructuring in Japan," American Economic Review 98(5): 1943-1977 (2008).

[12] "Annual Economic Report," Bank for International Settlements, June 2019, p. 19.

[13] Professor Morrison documents sharp disagreement among bankruptcy experts in Kenneth Ayotte and Edward R. Morrison, "Valuation Disputes in Corporate Bankruptcy," University of Pennsylvania Law Review 166(7): 1819-51 (2018).

[14] See e.g., Kenneth Ayotte and Edward R. Morrison, "Valuation Disputes in Corporate Bankruptcy," University of Pennsylvania Law Review 166(7): 1819-51 (2018).

[15] For a similar critique of methods used by many experts, see Aswath Damodaran, "The Cost of Capital: The Swiss Army Knife of Finance," working paper (2016).

[16] Yaron Levi and Ivo Welch, "Best Practice for Cost-of-Capital Estimates," Journal of Financial and Quantitative Analysis 52(2): 427-63 (2017).

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Valuing Firms In A World Of Pandemic-Induced Bankruptcies - Law360

When bills become unmanageable, such as after a divorce, illness, or job loss, bankruptcy provides a filer with a financial safety net. It works by wiping out ordischarging qualifying debtcredit card balances, overdue utility bills, personal loans, gym memberships, and moreand giving the filer a fresh start. If youreconsidering filing for bankruptcy, youll want to learnwhat each chapter can and cannot do.

Individuals oftenfile for Chapter 7 bankruptcybecause its quick and doesnt require debtors to repay creditors. Higher-income earners who make too much for a Chapter 7 discharge canfile for Chapter 13 bankruptcy. Although a debtor must pay back some amount through a Chapter 13 repayment plan, Chapter 13 has other benefits, like preventing a home foreclosure or car repossession and reducing the amount owed on secured debt. Both bankruptcy chaptersstop harassing debt collectorsand put an end to wage garnishments, creditor lawsuits, and other collection actions.

Filing forbankruptcy will affect your credit score, but it will improve with timeand often far sooner than most filers expect. In fact, many people find that filing for bankruptcy repairs credit faster than would be possible otherwise.

Bankruptcy isnt just for individuals with consumer debt problems. Filing can benefit asmall business owner by minimizing personal liabilityafter a company closure or by helping a small business return to profitability.

Finally, no one wants to file for bankruptcy. If youneed bankruptcy helpbut have reservations, youre not alone. Not only have employerslaid off staggering numbers of workers due to the coronavirus outbreak, but companies large and small are closing at a record paceandmany businesses will seek bankruptcy relief. But thats not as bleak as it might seem. Each fresh startincluding yoursmoves the economy one step closer toward recovery.

Follow this link:

Bankruptcy - Nolo's Free Legal Encyclopedia | Nolo

WASHINGTON When the history of the COVID-19 pandemic is written, there will be more than a few words devoted to the retailers the virus decimated as it pounded the economy. The last month, in particular, has brought bankruptcies from well-known brands with deep roots around the country. This weekend, Hertz, the rental car giant, joined the list.

But the impacts of the coronavirus are only half the story. In some cases, such as restaurants and travel companies, the virus is undoubtedly the primary cause of trouble, but in others it looks more like an accelerant gas on a retail fire that has been burning for quite some time.

The last month has been particularly noteworthy. In the space of just two weeks, some of the best-known brands in America declared they were entering Chapter 11 bankruptcy and closing outlets across the country.

Back on May 4, Golds Gym, the national chain of exercise facilities, announced it was headed to Chapter 11, a move affecting roughly 4,000 employees and 700 locations in more than 20 states. The company said it was planning to permanently shutter 30 locations. And J. Crew, the well-known purveyor of preppy attire, also filed for Chapter 11, a move affecting 500 locations and 13,000 employees in 44 states.

On May 7, Neiman Marcus said it was entering Chapter 11, directly affecting roughly 13,000 employees at 68 stores in 18 states. And on May 14, JC Penney, the long-beleaguered legacy retail giant with 850 stores in 49 states said the same thing, a move affecting some 90,000 employees.

Let our news meet your inbox. The news and stories that matters, delivered weekday mornings.

Those are some well-known names, but in some ways their bankruptcies may not be shocking. Gyms and clothing stores are exactly the kinds of businesses that the coronavirus lockdown seems designed to damage. Raising ones heart rate and sweating are at-home activities these days and apparel shopping is done with a few clicks of a mouse.

But even before May, there were signs of trouble for the brick-and-mortar commerce world this year.

Back in mid-February, Pier One entered Chapter 11, a move that affected roughly 970 locations and 18,000 employees scattered around the United States with some in Canada. Art Van Furniture, said it would be shuttering on March 8, affecting 3,000 employees and 169 locations around the Midwest. And on March 11, Modells, which claimed to be the oldest sporting goods store in America said it was entering Chapter 11, closing the doors of about 140 locations with 3,600 employees on the East Coast.

And even beyond retail, there were signs of trouble elsewhere in the economy. In January, Bar Louie, the trendy upscale chain of bar/bistros, announced it would begin a bankruptcy restructuring hitting 90 locations and 1,500 employees.

In other words, even before the COVID-19 pandemic hit the United States, there were signs that 2020 might not be shaping up to be a great year for merchants with real-world physical locations. Part of that may have been economic exhaustion. The post-Great Recession expansion had been unfolding for more than 10 years (since 2009) when 2020 arrived. Some retrenching may have been inevitable.

But on the retail side there was also the steady march of e-commerce, which has been battering brick-and-mortar stores especially hard for a decade now. Consider the numbers from recent years.

In 2018, retailers closed nearly 6,000 brick-and-mortar locations permanently, according to Coresight Research. In 2019, the figure was even higher, 9,300 locations were shuttered. And, of course, all of those closures had nothing to do with the coronavirus pandemic.

For months now, much of the COVID conversation has centered on how the pandemic might change the nation. How deep will the changes be? What will the post-pandemic United States look like, particularly economically?

But even before the virus, the nation and its economy were going through major changes. Keep in mind all those closures in 2018 and 2019 came as the economy was booming.

There is no question that the coronavirus is hammering the U.S. economy and that it is taking a toll on some healthy businesses and employers. But the biggest economic impact from COVID-19 may be that it is pushing the economy into the future much faster than before, striking hard at businesses that were already weak from other challenges.

It all serves as a reminder that even after the pandemic is controlled, the road back to normal is not going to be easy, and normal may look very different.

Dante Chinni

Dante Chinni is a contributor to NBC News specializing in data analysis around campaigns, politics and culture.

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Hertz, JCPenney, JCrew join list of businesses filing bankruptcy - NBCNews.com

The list is growing: J.C. Penney, Neiman Marcus, Diamond Offshore Drilling, Alta Mesa Resources, Echo Energy, Alta Petroleum, TriPoint Oilfield Services, Sheridan Holding and Stage Stores.

More Texas businesses are filing for bankruptcy this year than during the Great Recession or anytime in the past two decades, and legal experts said the wave of insolvencies and restructurings is still far from breaking or hitting their peak.

Between Jan. 1 and May 5, more than 545 Texas companies filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code up from 234 such filings during the same period in 2019, a 133 percent jump, according to new data provided exclusively to The Texas Lawbook by Androvett Legal Media & Marketing.

ENERGY CARNAGE: More than 240 U.S. energy bankruptcies forecast by 2021

And bankruptcy courts in the Southern District of Texas specifically Houston are the epicenter for the historic number of corporate restructurings expected to be filed this year. So far in 2020, five times more business bankruptcies have been filed in Houston than in any of the other three federal district courts in the state. The Northern District of Texas is a distant second.

There is a tsunami coming, said Foley bankruptcy partner Holly ONeil. For tens of thousands of retailers and restaurants and other businesses, their incoming revenue completely stopped, but their expenses kept coming. The options for many of these businesses are running out.

The Androvett data show that an average of 32 Texas companies has filed to restructure each week this year, compared with an average of 13 companies a week last year and 23 corporate bankruptcies each week in the first half of 2017, which was the previous high in the state.

If you are a restructuring lawyer, you are going to be very busy, said Lou Strubeck, head of the bankruptcy and restructuring practice at Norton Rose Fulbright. Oil and gas and the retail sector had a whole lot of stress even before COVID-19. The only surprising thing is that we havent seen the explosion of bankruptcy filings already. But they are still coming.

Several other prominent companies including CEC Entertainment and Chesapeake Energy are reportedly preparing bankruptcy filings.

I expect the volume will go up significantly. We are in the early stages, said Duston McFaul, a partner at Sidley Austin in Houston. This has the makings to be a long, several-year cycle with widespread imbalances to address.

The surge of bankruptcies by small-business owners also has been delayed because the stay-at-home orders have prevented owners from finding and meeting with lawyers to handle their filings.

Creditors are being patient with retailers and restaurants, at least for a short time, according to McFaul.

Lessors are not rushing to push out distressed businesses because theres currently no one lined up to replace tenants, he said. A strained revenue stream is better than none at all.

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The same is true in the oil industry, except that energy company restructurings tend to be significantly more complicated because there are so many parties and because the price of oil continues to be unstable.

Lenders arent going to be too aggressive in forcing energy companies into court to reorganize, Strubeck said, because they dont know what they would do with the assets and they dont want to run these companies.

The big question is, will private equity jump in or are they gun-shy about oil and gas? said Bill Wallander, a partner at Houston-based Vinson & Elkins.

Matthew Cavenaugh, a bankruptcy partner with Jackson Walker in Houston, said the answer to that question is a reason why courts may have seen fewer prepackaged bankruptcies and more free fall bankruptcies.

In 2015 and 2016, there was a lot of capital waiting to invest, which was important for exiting bankruptcy, he said. Right now, theres not a lot of access to capital.

Cavenaugh said there is another underlying factor that needs to be considered.

Theres been so much money pumped into the system by the feds, he said. Theres no way to know the impact.

For a longer version of this article, please visit TexasLawbook.net.

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Texas bankruptcies are up, and Houston is the epicenter - Houston Chronicle

Tuesday Morning declared bankruptcy Wednesday morning. The off-price home decor store filed court proceedings, telling a judge its struggles before the pandemic hit only grew worse in recent months.

The company says it hopes to stay in business, but will close nearly a third of its locations this summer. Tuesday Morning currently operates five stores in Idaho, and two in Boise.

[Penneys, Pier 1, Gordmans & more: chains shutter some stores what we know now about local outlets]

According to bankruptcy documents reviewed by BoiseDev, two of those stores will close in the first wave. Store locations in Pocatello and Idaho Falls will close, starting as early as June 1. The company and its debtors said they looked at store profitability, sales trends, geography and the possibility of renegotiating leases as factors in the stores it chose to close.

The first wave includes 133 locations. Two stores in Boise, on Boise Ave. at Apple St., and on Milwaukee St. will remain open. Tuesday Morning did say in filings that up to 100 additional stores could close depending on attempts to renegotiate lease agreements.

Tuesday Morning joins other retailers like Pier 1, JCPenney, Neiman Marcus, and J Crew in bankruptcy court in the wake of the pandemic. So far, just Pier 1 announced it would totally shut down, including its Boise locations.

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Tuesday Morning will close some Idaho stores in bankruptcy - boisedev.com

Related Cos. Chairman Stephen Ross said the hotel and retail industries are being hit the hardest by the coronavirus pandemic, as travel has been dramatically curtailed and retail businesses have been forced to close up shop.

The crisis will force many retailers into bankruptcy, he said. That would add to a number of them, including department store chains Neiman Marcus, J.C. Penney and Stage Stores, and apparel maker J.Crew, that have already filed.

"You are going to have such a flood of cases going to the bankruptcy court," Ross told CNBC Tuesday morning during an interview on "Squawk Box."

"And these aren't really the type of bankruptcies that were induced by bad practices," he said. "It's really all driven by the pandemic."

In addition to malls and shopping centers, Related owns residential and office space across the U.S. In New York City, it operates the glitzy Hudson Yards mall and the Shops at Columbus Circle both of which remain shuttered as the city, the hardest hit in the nation, continues to employ drastic measures meant to curb the spread of the virus. Hudson Yards, notably, is anchored by the now-bankrupt Neiman Marcus.

Ross added he is most concerned about small business owners in the retail and restaurant business not being able to turn their lights back on. "Many of them probably don't have the wherewithal to reopen," he said.

The retail bankruptcy filings also threaten thousands of more workers in an economy that has already suffered tens of millions of lost jobs.

Meantime, Related's CEO, Jeff Blau, recently told CNBCthat many of the company's retail tenants had been deferring rent payments, as they try to work through the crisis.

By mid-April, he said Related had collected about 35% of April rents from its retail tenants overall. In its enclosed shopping malls, only about 20% of rent checks had come in, Blau said at the time.

Retail real estate landlords such as Simon, Brookfield and Macerich have been grappling with how to operate their businesses when rent is not being paid on time.

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Related Chairman Stephen Ross: Expect a 'flood' of retail bankruptcies because of the pandemic - CNBC

Andrew Harnik / AP Images

The number of companies filing for bankruptcy has surged to a clip not seen since May 2009, following the Great Recession, Bloomberg reported Thursday.

In May, 27 companies with at least $50 million in liabilities filed for court protection from their creditors, according to the report. This group of companies, which includes a range from retailers J.Crew, JCPenney, and Pier 1 Imports to air carriers like Latam, represents the highest number of bankruptcy filings since the Great Recession.

The filings have increased as the sweeping lockdowns to contain the new coronavirus have devastated the US and global economy. Over a decade ago, in May 2009, 29 companies filed for bankruptcy, according to Bloomberg.

Read more: GOLDMAN SACHS: Buy these 25 stocks that are wildly popular with hedge funds and have crushed the market this year

The year-to-date picture tells the same story. So far in 2020, there have been 98 bankruptcies by major companies, the most since 142 companies filed in the first four months of 2009.

It's likely that the big bankruptcies will continue. Even as the US begins to reopen its economy, many companies will not have survived the shutdown, or won't be able to keep up with a hit to demand in the immediate future.

"I think we're going to continue to see filings of at least the level we're seeing for a while," Melanie Cyganowski, a former bankruptcy judge now with the Otterbourg law firm, told Bloomberg.

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Bankruptcies have hit the fastest pace since the Great Recession and more companies are expected to file - Business Insider

From iconic department stores to entertainment giants, the coronavirus has seemingly spared no one in its devastation of the U.S. economy.

Falling consumer demand, reduced entertainment spending, and stay-at-home orders mandating certain businesses stay closed continue to take their toll on a retail industry that has been struggling for the past several years as consumers pivot to online shopping.

Even with the slow reopening of the economy as lockdowns beginning to lift, social distancing measures may continue for months. That will impact store capacity for retail and restaurants. For some businesses, these temporary changes could indicate bigger problems.

While bankruptcy doesnt inherently mean that a company will go out of business it's more a financial restructuring it does spell news of changes to come.

Heres a list of all the major companies to have filed for bankruptcy so far since the start of coronavirus.

Dean & Deluca

The New York City-based gourmet foods retailer filed for bankruptcy on March 31, one of the first businesses to show signs of trouble due to coronavirus impact. The company was founded in 1977 and was acquired by Pace Food Retail in 2014.

Apex Parks

Apex Parks, which owns and operates 14 family entertainment and water parks in New Jersey, California, and Florida, filed for Chapter 11 bankruptcy on April 8. A release from the company indicated that they do not intend to close.

FoodFirst, Bravo and Brio Restaurant Parent

FoodFirst Global Holdings, the parent company of restaurant chains Bravo Cucina Italiano and Brio Tuscan Grille, filed for Chapter 11 bankruptcy on April 10. FoodFirst acquired the brands in 2018.

True Religion Apparel

True Religion, a clothing brand known for its jeans, filed for Chapter 11 bankruptcy on April 13. The company, whose trendy denim rose to popularity in the 2000s, also filed for bankruptcy in 2017.

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CMX Cinemas

CMX Cinemas, a chain of movie theaters with dine-in options, filed for Chapter 11 bankruptcy on April 25. The theaters, owned by parent company Cinemex Holdings, was in the process of acquiring the Star Cinema Grill, a deal that was inked only six weeks prior.

Rubies Costume Company

Rubies, which manufactures costumes, wigs, and other festive gear, filed for Chapter 11 bankruptcy on April 30. Rubies claims to be the worlds largest designer and manufacturer of Halloween costumes.

J. Crew

The preppy retailer worn by celebrities and shoppers alike filed for bankruptcy on May 4. The company also owns Madewell, a womens clothing and accessory brand.

Golds Gym

Golds Gym, which owns and operates over 700 gyms in the U.S. and internationally, filed for Chapter 11 bankruptcy on May 4. The company said in a release they hope to be through the filing by Aug. 1, if not sooner.

Neiman Marcus

Luxury department store Neiman Marcus filed for Chapter 11 bankruptcy on May 7. The century-old retailer is one of several traditional department stores that could be headed for trouble.

Stage Stores, (Bealls, Goody's, Palais Royal, Peebles, Gordmans, and Stage Parent)

Stage Stores, which owns and operates almost 800 locations in smaller and more rural communities, filed for Chapter 11 bankruptcy on May 10. The brands sell a variety of goods, including apparel, cosmetics, and home goods.

JCPenney

Based in Plano, Texas, the retailer was founded more than a century ago as one of the countrys first department stores. But it has been on a downturn as people turn to online retailers and fast fashion to shop. JCPenney has faced financial trouble for several years, and filed for Chapter 11 on May 15. The retailer said it will announce the first phase of store closures in the coming weeks.

Pier 1 Imports

Home goods retailer Pier 1 Imports, which filed for Chapter 11 bankruptcy in February, announced May 19 that it is seeking bankruptcy court approval and plans to start a wind-down of business as soon as possible. The company was unable to find a buyer due to coronavirus impact. Pier 1 operates more than 900 stores nationwide.

Hertz

The Hertz Corporation, known for its car rental services, filed for Chapter 11 bankruptcy on May 22. Hertz, which owns other brands including Dollar and Thrifty, underwent a CEO change last week, its fourth in six years.

Tuesday Morning

Discount homewares retailer Tuesday Morning filed for Chapter 11 bankruptcy on May 27. The Texas-based company operates almost 700 stores in 39 states.

This list will be updated on a weekly basis.

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Which major retail companies have filed for bankruptcy since the coronavirus pandemic hit? Here's the list. - NBCNews.com

For small businesses struggling to survive during the coronavirus crisis, bankruptcy may end up beckoning.

While overall filings were down in April, the number of businesses that filed Chapter 11 bankruptcy which involves reorganizing debt and remaining in operation jumped 26% from a year earlier. And according to some experts, it won't be too long before the floodgates open to expose a glut of small firms seeking relief.

"All I'm doing all day long is fielding calls from businesses with anywhere from $25 million in revenue down to $50,000 and operating out of their house," said Charles Bullock, a bankruptcy attorney and a founder of Stevenson & Bullock in Southfield, Michigan.

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"They aren't ready to file now, they're trying to make it through shutdowns and stabilize their business before they attempt to reorganize it [in bankruptcy]," Bullock said.

In the first three months of this year, there were 5,952 business bankruptcy filings overall, up 6% from 5,614 in the same period in 2019, according to the American Bankruptcy Institute. In April, although combined filings (individual and commercial) dropped by a whopping 46%, experts say temporary factors caused it: economic stimulus money aiding both small businesses and individuals, as well as a pause in bankruptcy-spurring actions such as evictions, foreclosures and creditor collections.

Of course, that patience for non-payment won't last forever. Experts expect business bankruptcy filings to rise in late summer, after loans from the Paycheck Protection Programrun out and expanded unemployment benefits end (scheduled for July 31).

"Everyone I've spoken with is simply waiting until this period abates," said Richardo Kilpatrick, managing partner at Kilpatrick & Associates in Auburn Hills, Michigan. "The pipeline is full."

While bankruptcy is not the only option for a struggling business a firm could just dissolve due to little or no debt and few assets, for instance those with obligations that become unmanageable may discover bankruptcy is the best way to move forward.

First, if you expect your business to remain viable in the long-term but need relief from creditors now, a new option under Chapter 11 may be appropriate. This route allows a firm to remain operational and, generally speaking, renegotiate its debt and repay over a set amount of time, as well as take other steps to return to profitability.

Called Subchapter 5, this new route it took effect in February is for businesses with debt below a certain threshold (with some limitations). From now through next March, that cap is about $7.5 million. (Recently passed legislation raised it from $2.7 million for one year.)

This option is intended to make the bankruptcy process faster and less expensive for small businesses. It eliminates some costs and paperwork requirements, as well as allowing owners to retain their interest in the business, among other differences from typical Chapter 11 cases.

Nevertheless, a Subchapter 5 filing still comes with a hefty price tag: about $10,000 to $50,000, depending on the complexity of the case, said Stuart Gold, managing partner at Gold, Lange & Majoros in Southfield, Michigan. The filing fee itself is $1,717.

Before you get to the point of filing, however, you should consult with a bankruptcy professional to make sure it makes sense.

"You want to make sure you have a viable business that can survive and is in need of relief to warrant the fees," Gold said.

Meanwhile, a Chapter 7 bankruptcy involves a trustee liquidating the filer's assets and paying off creditors to the extent possible. While this is a common route for individuals, it may not be suitable for a business entity because it won't erase the firm's debt, said Cara O'Neill, a legal editor for Nolo.com and bankruptcy and litigation attorney in Roseville, California.

"Most business owners are concerned primarily with getting out from under their liability for business debt, and that's better done using a personal Chapter 7 or Chapter 13 filing," O'Neill said.

Even if your business is its own legal entity and kept separate from your personal finances, owners who provided a personal guarantee on their business debt are still on the hook even if the company goes into bankruptcy.

In that case, the way to potentially avoid your personal assets being seized i.e., your house, car, savings, etc. is to also file for personal bankruptcy.

"We'll see both the individual and the corporation file bankruptcy to get a fresh start or [stop] collection of any debt."

Charles Bullock

Bankruptcy attorney and a founder of Stevenson & Bullock

"That happens all the time," said Bullock, of Stevenson & Bullock.

"It could be a medium-sized business where the ownership group has been forced to guarantee debt, or an individual owner where the debt is overwhelming," Bullock said. "We'll see both the individual and the corporation file bankruptcy to get a fresh start or [stop] collection of any debt."

Most individuals file under either Chapter 7 or 13, which have filing fees of a few hundred dollars, and enlisting an attorney can add $1,200 to about $3,500, depending on where you live and the complexity of your case.

Both methods stop collection activity like calls from creditors or debt collectors, wage garnishments and, potentially, lawsuits from creditors. (Court judgments already in place are trickier to get rid of in bankruptcy, as are some other types of debt including student loans.)

However, there are differences in who qualifies and how debt is treated in each option. Chapter 7 generally is for people who lack enough income to repay their debt and have little in the way of assets. It also is the most common way to file individual bankruptcy.

This approach quickly erases many forms of debt, including from credit cards, medical bills, personal loans and, potentially, those personal guarantees. It does not, however, necessarily stop your car from being repossessed or prevent home foreclosure.

Chapter 13 generally gives you three to five years to pay back certain debt and keep the asset (i.e., house or car). It also prevents creditors from garnishing your wages or putting a levy on your bank account. For this filing option, you must have income, and your debt (both secured and unsecured) must be below a certain amount (about $1.6 million total).

For individuals with debt above that threshold, Chapter 11 might be the best choice. This is the least commonly used option for individuals.

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How to navigate bankruptcy if the coronavirus wrecks your business - CNBC

J.C. Penney is reopening stores in Texas, Florida, Indiana and Ohio on Wednesday as the clock is ticking in the largest bankruptcy filed since the coronavirus pandemic shut down the economy.

Details have emerged about the chains difficult path for exiting Chapter 11. Penney will attempt to spin off its real estate into a separate company and permanently close stores while its still trying to reopen locations.

Two big deadlines loom if Penney is going to exit in November, the date it put on a proposed timeline.

But time is limited to meet various steps, and triggers are built into the lending agreements to convert the bankruptcy to a liquidation, either on July 14 or August 15.

By mid-July, Penney has to persuade the lenders financing its bankruptcy to give it the next $225 million of the $450 million of debtor-in-possession financing that it secured and is required to enter a court-led restructuring. The lenders will release that money if they support Penneys business plan to exit bankruptcy, which has to be filed in June. Then, in August, if Penney doesnt have the support of lenders to finance the retailer when it leaves bankruptcy, the agreement calls for the bankruptcy to convert to a liquidation.

The companys biggest lenders include H/2 Capital Partners, Sixth Street Partners, KKR & Co. and Ares Management Corp. Some of the investors overlap with leveraged buyouts of other retailers that ended poorly over the past decade.

Until earlier this month, Sixth Street was funded by TPG, which was part of the group that sold Neiman Marcus in a 2013 leveraged buyout sale of the Dallas-based luxury retailer to a group led by Ares. Neiman Marcus filed for bankruptcy this month, as did another TPG-led leverage buyout, J.Crew.

H/2 Capital is hedge fund that invests in real estate.

KKR led the leveraged buyout of Toys R Us, which ended up liquidating in 2018.

Penney is working on its business plan, which hasnt yet been filed with the court, but a preliminary version was filed Monday with the Securities and Exchange Commission. Penney said in that filing that it could permanently close as many as 242 stores of its 846 stores. Most of those locations, or 192 stores, are in leased space, and the remaining 50 are in buildings owned by Penney.

Before the pandemic, the proposed go-forward fleet of 604 stores had higher average sales and higher profitable sales.

Also, Penney proposes in its plan to sell a 35% stake in a separate new real estate company to raise cash. Thats actually part of its lending agreement. It also said its going to sell and lease back distribution centers to raise more cash. The plan calls for Penney to issue new stock in addition to the equity in the real estate investment trust.

Penney owns a lot of real estate, and that property is likely drawing interest. Some stores in dying malls are finding new life as online fulfillment centers.

Amazon, which has already converted some former mall stores into online operations, is looking at Penneys, according to a report Monday in Womens Wear Daily. Penney also has 11 distribution centers that would be in demand by lots of retailers, not just Amazon, as the industry makes a secular shift online.

Joshua Sussberg, Penneys attorney, said during a hearing Saturday afternoon in bankruptcy court that the company will work around the clock to deal with all the issues.

I am very worried about this, and why Im having a hearing on a Saturday, said U.S. Bankruptcy Court Judge David Jones during the webcast hearing with 300 people on the line. The judge approved customary first-day motions that allowed Penney to continue paying employees, utilities and other operating expenses, including the honoring of gift cards.

Jones, who is also presiding over the Neiman Marcus bankruptcy case in Houston, reminded the lawyers, management, advisers, lenders and creditors on the call that retail bankruptcies have to move quickly regardless of the strength of the debtor.

I want to see this work. You have 85,000 people (Penney employees) depending on all of your skill sets and talents, Jones said.

A total of 153 of Penneys 846 stores will be open this week, including 34 stores in Texas, 12 in Florida, 7 in Indiana and 11 in Ohio.

A few more local stores will open but not all of its stores in Dallas-Fort Worth. Stores will open Wednesday in Frisco, Burleson, Mesquite, Rockwall, Sherman and Waxahachie. Arlington, Fairview and Alliance Town Center in Fort Worth have been open since earlier this month.

Penneys stores are opening with reduced hours Monday through Saturday from noon to 7 p.m. and Sunday from 11 a.m. to 6 p.m. Penney has added pandemic-related new practices and training, including additional cleaning and Plexiglass shields.

Heres the list of Texas stores reopening Wednesday:

Longview Mall 3550 McCann Rd Longview

South Plains Mall 6002 Slide Rd-Bldg A Lubbock

Ingram Park Mall 6301 Nw Loop 410 San Antonio

Cielo Vista Mall 8401 Gateway Blvd W El Paso

Meyerland Plaza 730 Meyerland Plaza Mall Houston

South Park Mall 2418 Sw Military Dr San Antonio

River Hills Mall 200 Sidney Baker St S (Hwy 16) Kerrville

La Palmera Mall 5488 S Padre Island Dr Ste 4000 Corpus Christi

Parkdale Mall 6455 Eastex Frwy Beaumont

Sunset Mall 6000 Sunset Mall San Angelo

Richland Mall 6001 W Waco Dr Waco

Barton Creek Square 2901 S Capitol of Texas Hwy Austin

Mall De Las Aguilas 455 S Bibb St Eagle Pass

Killeen Mall 2100 S W S Young Dr Ste 2000 Killeen

Valle Vista Mall 2006 S Expy 83 Harlingen

Victoria Mall 8106 N Navarro St Victoria

Post Oak Mall 1500 Harvey Rd College Station

Town East Mall 6000 Town East Mall Mesquite

First Colony Mall 16529 Southwest Frwy Sugar Land

Woodlands Mall 1201 Lake Woodlands Dr Ste 500 The Woodlands

Stonebriar Mall 2607 Preston Rd Frisco

Rolling Oaks Mall 6909 N Loop 1604 E San Antonio

Burleson Town Center 877 Ne Alsbury Blvd Burleson

Baybrook Mall 100 Baybrook Mall Friendswood

The Rim 17710 La Cantera Pkwy San Antonio

Memorial City 300 Memorial City Way Houston

The Crossing At 288 2500 Smith Ranch Rd Pearland

Tech Ridge Center 12351 N Ih-35 Austin

Southpark Meadows 9500 S Ih-35 Ste H Austin

Plaza At Rockwall 1015 E I 30 Rockwall

Waxahachie Crossing 1441 N Hwy 77 Waxahachie

Brazos Town Commons 24201 Brazos Town Crossing Rosenberg

Sherman Town Center 610 Graham Dr Sherman

Stonecreek Crossing 800 Barnes St San Marcos

These Texas locations are offering contact-free curbside pickup only:

North East Mall 1101 Melbourne Dr. Hurst

La Plaza 2200 S. 10th St Mcallen

Music City Mall 4101 E. 42nd St. Odessa

Broadway Square Mall 4401 S. Broadway Tyler

Twitter: @MariaHalkias

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JC Penney to reopen 153 stores as clock is threatening its bankruptcy reorganization - The Dallas Morning News

It seems an oasis of good news in a desert of bad: Small farmers who saw restaurant sales evaporate and farmers market sales erode, in the wake of COVID-19, have found alternative ways to sell produce. They contribute to boxes sold by shuttered restaurants, sell their own boxes out of their trucks, even offer delivery. And theyre selling retail, not wholesale, so the moneys good.

If chef and restaurateur Dan Barber asks how theyre doing, the unanimous answer is, Great.

But Barber has only to look a few weeks down the road to see bad news coming. The current model wont survive the peak summer harvest, says Barber, who for 16 years has run the farm and restaurant Blue Hill at Stone Barns, about 30 miles northeast of New York City, in addition to the 20-year-old Blue Hill, in Manhattan. Unfortunately, he has numbers to back him up. ResourcED, a project he and his colleagues created to sell market boxes at both restaurants, has launched a survey of small farmers, concentrated at first in the Northeast but expanding coast to coast. Between 30 and 40 percent of them predict that they wont be able to keep up with increasing volume.

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Nearly a Third of Small, Independent Farmers Are Facing Bankruptcy by the End of 2020, New Survey Says - gvwire.com

Bankruptcy is a term that tends to instill images of For Sale or Everything Must Go signs posted in windows, but this often is not the case. In fact, a bankruptcy filing is one way for a business to refocus its efforts and reorganize.

Indeed, throughout history, many Fortune 500 companies have at some point filed for bankruptcy, successfully reorganized and prospered. For this reason, a good bankruptcy lawyer approaches the process as a surgeon with a scalpel (rather than a sledge hammer). A company that files Chapter 11 bankruptcy will, in most cases, be a debtor-in-possession, and its management and board will retain control of the company so it can continue to conduct business during the pendency of its reorganization. In order to assist employers in understanding some of the bankruptcy nuances, we have prepared this alert identifying some of the most important employment and employee benefit issues in US bankruptcy cases.

Bankruptcy affords distressed companies many types of relief, but none is more immediate and profound than the automatic stay. One of the principal purposes of bankruptcy is to allow a debtor to have a breathing spell a respite from creditor pressure so that it can assess its strengths and weaknesses, take stock of all obligations and develop a plan to pay creditors while moving forward as a restructured company (or perhaps sell its assets and wind down). The automatic stay is effectively a broad, nationwide injunction triggered immediately upon the filing of a bankruptcy petition that stops almost all actions and proceedings against a debtor or its assets. This includes employment-related and other litigations, foreclosures, collection actions, enforcement of judgments and actions to perfect liens granted before the bankruptcy was filed.

Critically, the automatic stay will only enjoin actions against the debtor on the basis of its pre-bankruptcy actions. For example, a plaintiff in a wrongful termination action will have to pause its litigation against its debtors former employer, and their claim will become a general unsecured claim in the bankruptcy that would be paid pro rata with other unsecured creditors. If, however, the debtor wrongfully terminates an employee after the filing of the bankruptcy petition, the automatic stay will not prevent that employee from suing the debtor for its post-bankruptcy conduct.

While a company that files for Chapter 11 bankruptcy has the ability to remain in possession of its operations, the Bankruptcy Code imposes many restrictions, which, if not addressed, will hamper business operations. Typically, a debtor files a series of first-day motions, which will ask for immediate temporary relief to allow operations to continue. Examples of such requests include asking for court approval to (1) continue using existing cash management systems, (2) continue customer programs, (3) continue using existing insurance and (4) address payment of pre-bankruptcy employee wages and benefits.

Specifically, any pre-bankruptcy wages and benefits that employees have earned but for which they have not been paid are claims against the estate, which ordinarily would require each employee to file a proof of claim and await administration of the bankruptcy prior to receiving payment. This delay would substantially disrupt operations within the company employees who are not paid may not come to work, hampering the reorganization effort. Recognizing the importance of paying employees, the Bankruptcy Code gives payment priority to employee wages earned in the 180 days prior to the case being filed, capped at US$13,650 per employee. Because employees have this priority right to payment and because paying employees is integral to maintaining its workforce, a debtor will file a first-day motion asking for court approval to pay in the ordinary course prebankruptcy employee wages and benefits up to US$13,650. Courts regularly approve this motion, sometimes even for amounts exceeding the statutory cap, if the debtor can make a compelling case. The first-day wage and benefits motion is critical to a debtors soft landing and smooth transition into bankruptcy.

Bankruptcy is necessarily disruptive to a companys operations and often results in substantial uncertainty; accordingly, companies in Chapter 11 often experience trouble retaining essential employees and top management. To prevent attrition at the most critical levels, debtors may seek to implement key employee retention plans (KERPs) and/ or key employee incentive plans (KEIPs). There was a time when courts would approve a KERP enhanced payment for simply sticking with company by deferring to the business judgment of the debtor. This was a relatively low standard of review, which resulted in a perception of abuse. Ultimately, this perception led to stricter standards.

Section 503(c) of the Bankruptcy Code was enacted to stop the travesty of high-level corporate insiders who walk away with millions while the companys workers and retirees are left empty-handed. Section 503(c) restricts retention or severance payments to insiders, which are intended solely to induce them to remain with the debtor. It also prohibits any such payments to insiders and others that are outside the ordinary course of business and not justified by the facts and circumstances of the Chapter 11 case. Under this stricter standard, KERPs are more difficult to justify, and it is even questionable whether long-standing pre-bankruptcy KERPs will be honored in bankruptcy, if they are primarily retentive in nature.

The introduction of 503(c) and the limits on KERPs have given way to a preference for KEIPs. Rather than retentive in nature, KEIPs are designed to reward an employee for performance. For a KEIP to withstand scrutiny, it must be viewed as a payment for value, rather than a payment to simply stay with the debtor. Any KEIP seeking to side-step section 503(c) requirements must establish performance goals such as successfully reorganizing the company, meeting sales targets, etc. KERP/KEIP analysis in the bankruptcy setting requires detailed considerations beyond the scope of this article, and a company considering bankruptcy should raise these issues with their restructuring counsel prior to filing a bankruptcy petition.

In addition to the automatic stay, another significant benefit of Chapter 11 is that it allows a debtor to assume or reject its existing executory contracts. Executory contracts are those where performance obligations remain for both parties such that failure to perform would be deemed a breach. During bankruptcy, the debtor is entitled to use its business judgment to decide whether to assume or reject any executory contracts to which it is a party. Provisions in those agreements purporting to prohibit or restrict such rejection are unenforceable.

If an executory contract is assumed, it reaffirms the debtors decision to continue with that agreement, and the debtor must cure all existing defaults. If an executory contract is rejected, the agreement is not terminated, but it constitutes a breach by the debtor, which will relieve the non-debtor party from performance, and any damage claim that arises from that breach is treated as a pre-petition general unsecured claim. A contract must be assumed or rejected as a whole (i.e., it is all or nothing). Note that, generally, the deadline to make the decision to assume or reject executory contracts is made toward the end of the bankruptcy case. Pending that decision, the parties to executory contracts are generally obligated to perform under the contract.

Employment agreements are often executory contracts subject to assumption or rejection by a debtor. Typically, employment agreements are not assumed during the pendency of a bankruptcy case because it is uncertain how a case will resolve, and a debtor will not know if it wants to keep on any particular employee (e.g., there may be changes in management).

However, it is not uncommon for a debtor to terminate an employee that is subject to an employment agreement. In that circumstance, the debtor will seek to reject the employment agreement, which ordinarily will give rise to claims for breach by the terminated employee. Employment agreements are not the only executory contracts impacting the debtors employment operation. Contracts for payroll services, outside human resource management, and even collective bargaining agreements, are also executory contracts that may be assumed or rejected.

Among a debtors contract rejection powers is the ability to seek to reject collective bargaining agreements (CBA). This is a uniquely powerful tool that can allow a debtor to renegotiate and restructure substantial legacy costs. In order to reject a CBA, section 1113 of the Bankruptcy Code requires the debtor to present the authorized representative of the bargaining unit with a proposal containing what the debtor believes are the necessary modifications to the CBA to ensure that all affected parties (e.g., debtor, creditors and employees) are treated fairly and equitably. The debtor must also give the bargaining unit all necessary information to assess the proposed modifications. Then, the debtor and the bargaining unit must engage in good faith negotiations for a reasonable period. If no deal is reached, the court can approve the CBA rejection so long as (a) the debtor has fulfilled the various requirements set forth above; (b) the court determines the bargaining unit has rejected the proposal without good cause; and (c) the balance of the equities favors rejecting the CBA.

Note that even if a CBA is rejected, the debtor is not relieved of its duty to meet and bargain with the union the union remains the representative of the employees.

The federal Worker Adjustment and Retraining Notification Act (WARN) requires covered employers to give 60 days advance written notice of certain plant closings or mass layoffs to affected employees. Covered employers for WARN purposes are those with 100 or more full-time employees. Notice is generally required when 50 or more full-time employees experience an employment loss due to a plant closing or mass layoff. Some states have their own versions of WARN laws as well.

If WARN compliance is not top of mind for a distressed company as it is managing to a possible bankruptcy filing, it needs to be. It is critical to address these issues, as remedies for failure to provide timely WARN notice includes back pay for the period of the violation plus penalties and attorneys fees. Post-petition WARN violations are at risk of being treated as administrative claims while pre-petition violations have the same priority as other wage claims.

There are provisions in the WARN statute allowing the employer to shorten the 60-day notice requirement but, importantly, not to be excused entirely from providing notice.

The faltering company exception applies to a plant closing (but not merely a mass layoff) where, at the time notice would have been required, the employer was actively seeking capital or business, which, if obtained, would have enabled the employer to avoid or postpone the shutdown and the employer reasonably and in good faith believed that giving the required notice would have prevented the employer from obtaining the needed capital or business.

The natural disaster exception applies when employment losses triggering notice are the direct result of natural disasters (e.g., floods, earthquakes, storms, droughts and similar effects of nature).

The unforeseeable business circumstances exception (which is the one that will likely be relied upon the most during the COVID-19 pandemic) applies if the closing or mass layoff is caused by business circumstances that were not reasonably foreseeable as of the time that notice would have been required. Reasonably foreseeable means probable, not just possible, which means an employer should constantly reassess whether this exception applies. Unforeseeable business circumstances include an unanticipated and dramatic major economic downturn or non-natural disaster, as well as a government ordered closing of an employment site that occurs without prior notice.

Importantly, however, even if one of the WARN exceptions applies, the employer is still required to give as much as notice as is practicable and at that time must give a brief statement of the basis for reducing the notification period. Distressed companies need to be aware of and monitor their notice responsibilities under WARN (and state WARN laws if applicable) early on and continually reassess whether (and how much) notice is needed throughout the bankruptcy process.

One of the more important concepts regarding employee benefits is the controlled group rules. Both the Internal Revenue Code (Code) and the Employee Retirement Income Security Act of 1974 (ERISA) aggregate different entities that are part of a controlled group for purposes of determining both overall compliance and liabilities related to various employee benefit rules. The following is a sample of various employee benefits rules that are impacted by the controlled group rules:

Controlled group members are jointly and severally liable for pension plan obligations, such as single employer pension plan liabilities, multi-employer pension plan liabilities (such as withdrawal liability) and pension plan termination premiums.

Obligations to offer continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA).

The requirement to offer affordable healthcare coverage under the Affordable Care Acts employer mandate tax.

Prior to commencing a bankruptcy case, it is important to identify all members of the controlled group and their potential employee benefit plan implications. In other words, it might be important to be certain that all entities that are jointly and severally liable in a controlled group file for bankruptcy protection at the same time. There are generally two types of controlled groups a parent-subsidiary controlled group or a brother-sister controlled group.1

A parent-subsidiary controlled group exists when a parent company owns (directly or indirectly) at least 80% of another entity. Below is an example of a parent-subsidiary controlled group with Corporations A, B and C.

The second type of controlled group is a brother-sister controlled group, which is a bit more complicated than the parent-subsidiary controlled group. In the general sense, a brother-sister controlled group exists if both (1) the same five or fewer people own 80% of one entity and (2) the same five or fewer people together own more than 50% of another entity taking into account the ownership of each person only to the extent such ownership is identical with respect to each organization. The following is an example of the brother-sister controlled group analysis from the IRS:

Example: Adams Corp and Bell Corp are owned by four shareholders, in the following percentages:

In this example, the first test is met because the shareholders own 100% of the stock; however, a brother-sister controlled group does not exist because the second test is not met as shown by the following percentages:

When applying these rules, the Treasury Regulations provide certain ownership attribution rules. The application of the ownership attribution rules can result in a brother-sister controlled group if the ownership interest is deemed held by another.

One of the many considerations to take into account in a bankruptcy is how to handle pension plan liabilities. Prior to the introduction of 401(k) plans in the 1980s, many employers offered retirement benefits in the form of defined benefit pension plans. These pension plans can have significant underfunded liabilities. In addition, some pension plans were part of good faith negotiations between an employer and a union.

Similar to other employee issues discussed above, the automatic stay comes into play with respect to pension plan liabilities. As a reminder, the automatic stay applies to the debtor that filed and it would generally not apply to the pension plan and its underlying trust this is because the pension plan and trust are separate legal entities and are not debtors. However, it is often the case that a debtor is a plan sponsor or a participating employer. The automatic stay would not prevent a claim for benefits under the pension plan and underlying trust; however, the automatic stay could provide protection from the debtor being subject to Pension Benefit Guaranty Corporation (PBGC) liens and IRS funding deficiency excise taxes. Accordingly, it is important to identify the roles that a debtor may play with respect to a pension plan and to identify any outstanding pension plan liabilities prior to filing the bankruptcy.

A Chapter 11 debtor may seek to sell some or all of its assets. In most cases, this sale will take the form of an asset sale, such as a sale of a plant or facility. In rare cases, the sale will take the form of a stock/equity sale of the entity.

Similar to the non-bankruptcy setting, an asset sale ordinarily involves the termination of the employment relationship between the asset seller and the individuals employed at the plant/facility followed by the possible immediate employment of those individuals by the asset buyer. In that situation, the parties must be aware of what employee-related obligations are triggered, such as severance, payment of accrued vacation/paid time off, and obligation to offer COBRA coverage. In contrast, the employment relationship usually is not terminated in the case of a stock/equity sale. Therefore, it is important to keep in mind the structure of the sale.

This article discusses high-level employment issues in bankruptcy, but it is essential to understand that a debtors administration of its case is subject to oversight from various constituencies, such as the Office of the US Trustee, financial stakeholders and the statutory committee of unsecured creditors (the Committee). The Committee is established at the outset of the case and is composed of a group of unsecured creditors who serve in a fiduciary capacity for the benefit of all unsecured creditors. In a Chapter 11 case, as long as there are creditors willing to serve on the committee, a committee will be usually be formed. The Committee allows unsecured creditors to have a voice in a debtors case and influence the outcome, while ensuring that the interests of unsecured creditors are protected. It has standing to be heard in court on any issue and it has broad powers, which make it an effective watchdog and relevant constituent in the case. The Committee is permitted to hire professionals (including counsel) at the debtors expense.

A successful Chapter 11 case typically requires a debtor to build consensus among its various constituent groups. To accomplish this, regular consultation with the Committee is essential. For example, a proactive debtor might request Committee input before seeking court approval of a KERP or KEIP so that the debtor can negotiate terms and perhaps avoid an objection. Managing its stakeholder and various constituent groups requires a debtor to play a game chess, and it is through this lens it should analyze its options and strategy, including those impacting employment issues.

1 Note In addition to controlled groups, entities may be required to be aggregated if they constitute an affiliated service group. An affiliated service group exists where certain common ownership interests exist between two entities and employees of those entities perform services for the other entity.

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Employee Benefit Issues to Know In Bankruptcy - The National Law Review

Some states experiencing enlarged deficits due to Covid-19 are hoping for a bailout from Congress. Senate Majority Leader Mitch McConnell briefly suggests that state consider filling for bankruptcy as an alternative. Neither seems like a particularly attractive option, for a variety of reasons. But is there any alternative?

Professors John S. Baker Jr. and Robert T. Miller recently suggested a third option in theWall Street Journal, and it's not default. Perhaps counter-intuitively, they suggest the best approach for many states may be "more borrowing"albeit with contractual provisions that will make investors more willing to lend. They write:

States can put investors at ease by waiving their claim to sovereign immunity in the contract under which the bonds are issued. States routinely give such waivers, and courts enforce them.

States can do more. They can agree that the contract under which the bonds are issued will be subject to the law of another jurisdiction and that they themselves may be sued in courts of that jurisdiction. This helps attract investors, because just as creditors generally don't trust a court in a country with poor credit to enforce the terms of a bond contract against that country, many wouldn't expect, say, a California court to enforce a California bond contract. . . .

States could reduce the interest rates they would otherwise pay by providing bondholders with credit enhancements. The simplest one would involve offering some state property as collateral, which would require an additional waiver of sovereign immunity. Another would be to set up a "sinking fund," which would require the state to deposit a certain percentage of its tax revenue into a trust located in another jurisdiction for the benefit of bondholders.

Borrowing in the capital markets allows states to solve their own problems. It preserves states' sovereignty and avoids a federal bailout, which would perversely reward spendthrift states. Suddenly, states would have large real obligations enforceable against them, which would teach financial discipline.

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A Third Option Beyond State Bailouts and Bankruptcy - Reason

With economic disruption affecting almost every industry and sector around the globe, a wave of insolvency, bankruptcy and workout issues will almost certainly appear in the coming weeks and months. Companies and individualswhether as lenders, borrowers, investors, vendors, landlords/tenants, sellers/buyers or stakeholderswill be facing these issues directly and with other companies and individuals and will be required to navigate challenges as well as seek opportunities. Preparing today for how to respond and address these issues is essential.

Drawing upon decades of experience and lessons learned from previous economic downturns, Manatts team of bankruptcy, restructuring and distressed assets professionals will provide guidance during this 30-minute webinar on what to expect during this period of economic uncertainty and will discuss cross-industry considerations for addressing the obstacles and opportunities presented by it.

Topics to be covered include:

Even if you cant attend our live session on May 28, click here to register now and receive a link to view the program on demand.

Presenters:

Carl L. Grumer, Partner, BankruptcyIvan L. Kallick, Partner, BankruptcyRichard J. Maire, Jr., Partner, Corporate and FinanceGrace D. Winters, Partner, Manatt Real Estate (Moderator)

For regular updates on the major challenges companies are facing, please visit our COVID-19 resources page, and subscribe for timely updates in your inbox here.

Date and Time

Thursday, May 28, 20201:001:30 p.m. PT4:004:30 p.m. ET

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What Every Company Needs to Know About Insolvency, Workouts and Bankruptcy - Manatt, Phelps & Phillips, LLP

Dothan, AL (WTVY)-- A longtime Dothan attorney predicts the number of bankruptcies will soar in the next few months as the economic fallout from coronavirus deepens. The average wage earner is facing such dire times, Collier Espy told WTVY on Tuesday.

The number of unemployed changes daily, but hundreds of thousands in Alabama have lost their jobs during the pandemic. More than a billion dollars in jobless benefits, the bulk coming from federal stimulus funds, have been paid to Alabamians in recent weeks.

Eventually, those payments, up to $875 weekly, will either run out or be reduced, forcing many to make tough decisions.

I would say three to five months from now we'll see lots of bankruptcy filings, Espy predicts. He said in his life, including over 40 years as an attorney, he's never seen things this bad.

His advice is to avoid bankruptcy, if possible, but also said sometimes there are no alternatives. In my opinion (bankruptcy is) like surgery. You don't want surgery but if there is a condition that it's recommended to get better then (you have) surgery.

For those unable to meet their monthly financial obligations, Espy suggests taking care of essentials first. He recommends keeping sufficient funds to pay for automobiles, groceries, and gasoline, and utilities. Credit cards can wait.

Generally speaking, lenders can't, at this time, foreclose on home mortgages and evictions are not permitted under emergency law. However, those restrictions likely won't last long.

Financial experts recommend working with lenders, many of whom have promised leniency for those experiencing financial difficulty.

Espy said, if bankruptcy is the only option there are several ways to file, including some that would allow repayment of debts but with more manageable terms.

Nationally, the jobless rate is estimated to range between 17 and 20 percent, the highest since the Great Depression.

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Bankruptcies expected to soar, here's what you need to know - WTVY, Dothan

Photo: Spencer Platt/Getty Images

As we're all now well aware, the Covid-19 pandemic has been particularly tough on the fashion industry, with sales down across the board. And given that many companies especially those with more traditional business models were already struggling to adapt to a new retail environment or keep up with more digitally savvy competitors (remember: there were also plenty of bankruptcies and closures in 2019), the stay-at-home-orders were enough to fully decimate a number of them.

Some, like J.Crew and Neiman Marcus, declared bankruptcy, which typically means they're hoping some financial restructuring or a new investor couldultimately help them stay in business if they're lucky. Others have been forced to close up shop entirely.

From smaller brands without the cushion to weather a major drop in sales, to large retail chains that were saddled with debt before all this began, read on for a digital graveyard of all the fashion and beauty businesses that succumbed to the coronavirus and its negative impact on consumer spending. We'll keep updating this list as more of this bummer news emerges.

J.Crew: Debt-saddled J.Crew filed for Chapter 11 bankruptcy protectionMay 4. CEO Jan Singer described the decision as a financial restructuring and "a critical milestone in the ongoing process to transform our business with the goal of driving long-term, sustainable growth for J.Crew and further enhancing Madewell's growth momentum."

Neiman Marcus: With a reported $4.8 billion in debt, Neiman Marcusfiled for Chapter 11 May 7, saying in court documents that it expects to emerge from bankruptcy in the fall.

John Varvatos: On May 6, menswear brand John Varvatos filed for Chapter 11 bankruptcy protection, citing falling sales. The brand hopes to stay in business as it restructures its finances.

J.Hilburn: Another brand in the bankruptcy club as of May 6is J.Hilburn, a Dallas-based custom menswear retailer. The company employs stylists who work directly with customers in showrooms throughout the U.S., and hopes there will be no business disruption while it restructures its finances.

True Religion: The once-ubiquitous denim brand filed for bankruptcy for the second time in three years on April 13. It hopes to explore a sale or restructuring.

Bldwn: This Los Angeles-based contemporary brand (which originally launched as Baldwin in Kansas City and focused on denim) was an early victim of the pandemic, announcing a total closure March 25. According to a rep for the brand, investors decided to shut it down and all employees were let go.

The Modist: The Modist, an innovative online luxury retailer based in Dubai and focused on modest fashion, announced on April 2 it would be closing its doors permanently. According to the brand, the hit it took from the pandemic left it with no other options.

Elizabeth Suzann: On April 28, Nashville-based sustainable clothing brand Elizabeth Suzann announced that the company "as we know it" would be closing, with all employees leaving and its studio being vacated once existing orders were completed. Though, it sounds as if the founder could be back to work in some capacity by fall, TBD.

Anthom: New York designer boutique Anthom announced Friday, May 15 that it has permanently closed its brick-and-mortar doors. For now, it will continue operations online.

UPDATE, Monday May 18:

J.C. Penney: Long-struggling department store chain J.C. Penney filed for Chapter 11 bankruptcy protection on May 15. The company said it's working with its lenders on a restructuring plan to reduce debt and will explore a possible sale. It plans to continue operations and begin opening stores as it's deemed safe.

Centric Brands: This licensee company, which recently bought Zac Posen and produces products for Tommy Hilfiger, Under Armour, Calvin Klein and more filed for Chapter 11 on Monday May 18. It is working with lenders on a financial restructuring and plans to continue operations throughout the process.

UPDATE, Tuesday May 19:

Jeffrey: Nordstrom Inc., which bought a majority stake in the luxury boutique Jeffrey in 2005, has decided to permanently close all of its three locations. In turn, Jeffrey Kalinsky, who also acted as Nordstrom's designer fashion director, is retiring. According to the company, the decision to eliminate all Jeffrey stores as well as 16 Nordstrom stores was a response to the pandemic. In a statement, Kalinsky said: "Nordstrom has been an incredible partner to me and to the Jeffrey brand. While I'm disappointed in their decision to close Jeffrey stores, I understand it is the right decision for the business given the circumstances of this global crisis."

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All the Fashion and Beauty Brand Closures and Bankruptcies Caused by the Pandemic - Fashionista

Editors note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For our coronavirus tracker and more coverage, see our hub

YOU WILL get business failures on a grand scale. So declared James Bullard, president of the Federal Reserve Bank of St Louis, on May 12th. Peter Orszag, a former official in Barack Obamas White House and now with Lazard, an investment bank, warned that the American economy could face a significant risk of cascading bankruptcies. How bad will things really get for America Inc?

The country has already seen a surge of corporate bankruptcies among big firms that puts 2020 on track to be the worst year since 2009, at the height of the global financial crisis. In recent weeks well-known firms ranging from Neiman Marcus, a department-store chain, and J Crew, a clothing retailer, to Golds Gym, a glitzy workout group, have gone bust. Hertz, a giant car-hire firm, and Chesapeake Energy, a pioneer of Americas shale industry, are both on the brink of bankruptcy.

As the American economy sinks further in the coming months, many more firms are sure to get into trouble. This raises three questions. What early-warning signs might reveal the scale of the coming wave of bankruptcies? How does the looming disaster compare to the pain endured during the financial crisis? And are there meaningful alternatives to outright bankruptcy?

First, to harbingers of doom. One is the upheaval in the market for speculative grade (or junk) bonds. In America, two-thirds of non-financial corporate bonds are rated junk or BBB, the level just above junk. In April, Goldman Sachs, another investment bank, predicted that over $550bn of investment-grade bonds will fall to junk status by October (adding roughly 40% by current value to the junk-bond market).

Edward Altman of NYU Stern Business School reckons that about 8% of all firms whose debt is rated speculative grade (about 1,900 in all) will default in the next 12 months. This figure could reach 20% over two years. He expects at least 165 large firms, those with more than $100m in liabilities, to go bankrupt by the end of 2020.

A measure known as the distress ratio also highlights the problem. Distressed credits are junk bonds with spreads of more than ten percentage points relative to US Treasuries. S&P Global, a credit-rating agency, reckons that distressed credits as a share of total junk bonds in America had grown to 30% by April 10th, up from 25% on March 16th. Of the 32 worldwide junk-bond defaults in April, a level not seen since the financial crisis, 21 took place in America. S&P Global estimates that the 12-month trailing default rate for junk bonds in America increased to 3.9% in April, from 3.5% in March. In Europe it rose to 2.7% from 2.4%.

A wave of defaults might unfold with varying severity across different industries. Thanks to the collapse of the oil price as well as other troubles in the shale patch, almost 70% of the speculative-grade debt in the oil-and-gas industry is at distressed levels. Five other sectors have ratios of 35% or higher: retail and restaurants, mining, transport, cars and utilities (see chart).

The upshot is that a second, bigger wave of bankruptcies is on the cards. How would that compare to past troubles? At the peak of the financial crisis, the global default rate for junk bonds was 10%. Moodys, a credit-rating agency, predicts that if the current crisis is more severe than the financial crisis, as now seems likely, the default rate could rise to 20.8% (see chart). The coming bankruptcy wave could be worse than during the financial crisis because it will be more widespread, reckons Debra Dandeneau, a bankruptcy specialist at Baker McKenzie, a law firm. But she thinks it will take some months to arrive: Were in the eye of the hurricane now.

Another big difference to the financial crisis arises from uncertainty. The nature of this pandemic makes it impossible to know when the economy might return to normal. As William Derrough, a restructuring specialist at Moelis & Company, points out, Its very hard to value a company that doesnt have clear cashflow and visibility on its future markets. Jared Ellias at the University of California at Hastings argues that lenders dont know whether to restructure out of court, grant forbearance or insist on Chapter 11 bankruptcy when you have no idea when a firm will make money again. Worried about the coming deluge of cases, he organised a group of experts that last week petitioned Congress to appoint more bankruptcy judges and increase budgets for law clerks and other staff.

It will be very difficult for courts to keep up with the onslaught, says Judith Fitzgerald, a former bankruptcy judge now at Tucker Arensberg, a law firm in Pittsburgh. Amy Quackenboss of the American Bankruptcy Institute, an industry body, reports that members are busy, which will translate into more filings later on. Larry Perkins of Sierra Constellation Partners, a restructuring firm, thinks a legal bottleneck is absolutely possible unless courtrooms evolve to digest it. Vince Buccola of Wharton business school thinks part of the solution lies in embracing faster pre-packaged bankruptcy deals and debt exchanges (lenders agreeing to swap less onerous new debt for old unserviceable debt) done out of court.

A looming wave of bankruptcy cases points to the third question: how viable are the alternatives? There is good and bad news. The financial crisis saw a massive liquidity crunch and financial-sector implosion. But as Bruce Mendelsohn of Perella Weinberg Partners, an investment bank, observes, this crisis is the opposite. Capital markets are strong and open with many firms able to access capital from government or from markets, butthe fundamental operations of businesses are disrupted.

There is a flurry of activity among investors pouring money into so-called rescue funds. According to Preqin, a data firm, distressed-debt funds are looking to raise nearly $35bn. General Atlantic, a private-equity firm, is in the midst of raising nearly $5bn to invest in otherwise-healthy businesses squeezed temporarily by shutdowns. Bill Ford, General Atlantics boss, thinks that outside the retail sector, where many business models will prove unviable, most firms will try to avoid bankruptcy and seek rescue capital instead.

All restructuring firms are hiring, notes Michael Eisenband of FTI Consulting. He observes that there are more types of creditor today than during the financial crisis, so there is more opportunity to get liquidity into firms in different ways. He reckons few want to force liquidation because if you can kick the can down the road, maybe a vaccine comes andthere is a better chance of getting a recovery for creditors. Many hedge funds and non-traditional lenders (though not stodgy banks) are opting for debt-for-equity exchanges. That is so they get the upside when the economy recovers, says Thomas Salerno of Stinson, a bankruptcy lawyer.

So the good news is that many squeezed firms staring at bankruptcy might be saved through restructuring. Mr Derrough, a veteran of financial crises, explains that this involves five steps: stopping the bleeding; evaluating the injuries; performing the necessary surgery; rehabilitating the victim; and returning it to health. The bad news is that America Inc is at the start of phase one. As he puts it, Most of what we are doing is blood transfusions. We havent even gotten to stopping the bleeding.

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This article appeared in the Business section of the print edition under the headline "Chapter 11s new chapter"

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Eye of the hurricane - America Inc faces a wave of bankruptcies | Business - The Economist

Editors note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For our coronavirus tracker and more coverage, see our hub

EUROPEAN BUSINESSMEN who filed for bankruptcy used to be treated harshly. The word bankrupt derives from banco rotto, the practice in medieval Italy of smashing the benches that merchants sold their goods from if they did not pay their debts, to force them to stop trading. Until the mid-19th century defaulters were thrown into debtors prisons. Bankruptcy proceedings are now less violent, but in many European countries they mostly end in liquidation rather than restructuring.

The fear of multiple bankruptcies and mass unemployment because of measures imposed to contain the covid-19 pandemic is the main reason European governments are subsidising businesses on a vast scale. No healthy company should go bankrupt because of corona, promised Peter Altmaier, Germanys economy minister, in mid-March when he announced extended credit lines, liquidity guarantees and grants for German businesses amounting to 750bn ($807bn). At the end of March the German government suspended insolvent firms obligation to file for bankruptcy until the end of September (and perhaps until March 2021)provided they can prove their troubles were caused by covid-19. France, Spain and other European countries have introduced similar exemptions.

These emergency measures are buying time. Bankruptcies and unemployment have not yet risen sharply. According to the Institute of Economic Research in Halle (IWH) bankruptcies in March and April in Germany were no higher than in the same months last year. Yet rescue measures probably just postpone a surge in bankruptcies, says Steffen Mueller of the IWH. Mr Mueller thinks zombies will be swept away later this year, but worries that even healthy companies may not survive.

Governments have learned a lesson from the global financial crisis. Bankruptcies increased by 32% in western Europe in 2008. Ludovic Subran of Euler Hermes, a Paris-based credit insurer, is forecasting a rise of 19% compared with 2019 to 178,365 insolvencies this year. The corporate carnage was so brutal in 2008 because of the credit crunch, explains Mr Subran. A sudden slump in the availability of loans sealed the fate of many firms. This time EU governments have reacted far faster by pumping liquidity into the economy. Moreover, the rate of bankruptcies was very low between 2002 and 2007 whereas this time Europe has seen a clean-out in the past five years, with many firms going bust.

Mr Subrans forecast seems optimistic considering that some industries suddenly lost all their business. The most vulnerable firms are in the hospitality, transport and non-food retail sectors. They were among the most insolvency-prone businesses before the covid crisis. Germanys Karstadt Kaufhof, an ailing department-store chain, and Frances Orchestra Prmaman, a troubled clothing retailer, both filed for receivership in April. In Britain Carluccios, a restaurant chain, Brighthouse, a rent-to-own retailer, and Laura Ashley, a fashion chain, tumbled into administration in March.

The other weak link is Europes 25m small and medium-sized enterprises (defined as firms with fewer than 250 staff), which employ over 90m people. According to SMEunited, a European lobby group, 90% of Europes small firms are affected by the pandemic and 30% of them say they are losing 80% of sales or more. CPME, Frances small-business federation, says 55% of small firms are concerned about bankruptcy. The French governments 7bn solidarity fund for small companies has already been tapped by 900,000 firms.

Behemoths have been rescued by the state, as so many jobs depend on them. France and the Netherlands are providing a taxpayer-funded bail-out of about 10bn to salvage Air France-KLM from bankruptcy. Germany will follow with a bail-out for Lufthansa. Small businesses will suffer most in spite of short-term work schemes, cash payments, delays to tax deadlines and credit guarantees. But never before have governments done so much to try to help them avoid the Schuldturmthe prison tower that was the destination, in the past, for those who couldnt pay their debts.

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This article appeared in the Business section of the print edition under the headline "Buying time"

Originally posted here:

A wave of bankruptcies is coming in Europe - The Economist

Posted: May 19, 2020 / 05:44 AM EDT / Updated: May 19, 2020 / 07:38 AM EDT

(CBS News)-J.C. Penney will permanently close nearly 30% of its 846 stores as part of a restructuring plan under bankruptcy protection.

The Texas-based retailer said Monday it plans to close about 192 stores by February, then another 50 in 2022. That will leave the company with just over 600 stores.

J.C. Penneyfiledfor bankruptcy reorganization Friday, making it the biggest retailer to do since thecoronavirus pandemicforced stores to temporarily close. After announcing bankruptcy, the company said its physical stores and online sales operations will stay open during restructuring.

J.C. Penney will permanently close nearly 30% of its 846 stores as part of a restructuring plan under bankruptcy protection.

The Texas-based retailer said Monday it plans to close about 192 stores by February, then another 50 in 2022. That will leave the company with just over 600 stores.

J.C. Penneyfiledfor bankruptcy reorganization Friday, making it the biggest retailer to do since thecoronavirus pandemicforced stores to temporarily close. After announcing bankruptcy, the company said its physical stores and online sales operations will stay open during restructuring.

In its most recent quarter, J.C. Penneys sales fell nearly 8%, to $3.4 billion, from the year-earlier period, while income was $27 million, down from $75 million for the same period a year ago. J.C. Penney missed two debt payments in April and May, which analysts saw as a harbinger of bankruptcy.

CEO Jill Soltausaidlast week that J.C. Penneys leadership made significant progress toward rebuilding the company, but the coronavirus closures showed them they must eliminate debt in order to fully revive the company. She said bankruptcy is the best path to ensure that JCPenney will build on its over 100-year history to serve our customers for decades to come.

J.C. Penney has already begunreopeningsome locations, including in Arizona, Florida, Georgia and Texas.

The companys bankruptcy comes days after J.C. Penney gave its top executives millions of dollars in bonus pay. Soltau received $4.5 million, while chief financial officer Bill Wafford, chief merchant officer Michelle Wlazlo and chief human resources officer Brynn Evanson each got $1 million.

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J.C. Penney is closing 240 stores as part of its bankruptcy plan - WRBL