The Year In Bankruptcy: 2018

Rumors of another recession multiplied as the tumultuous second year of the Trump administration came to a close. Highlights of 2018 included a simmering trade war with China; political upheaval after the House of Representatives was retaken by Democrats in the midterm elections; mayhem in financial markets; and, in December, the beginning of the longest government shutdown in U.S. history, triggered by lawmakers' refusal to provide $5.7 billion in funding for a U.S.-Mexican border wall.

Despite the political roller-coaster ride and indications of trouble on the horizon, 2018 was a good year economically for the U.S., with strong growth in the economy (2.8 percent); low inflation (2.2 percent); and the lowest unemployment rate in 50 years (3.9 percent).

These developments prompted the U.S. Federal Reserve to raise its benchmark federal-funds interest rate in December 2018 to a band of 2.25 to 2.50 percent, the highest rate since the spring of 2008, marking the fourth increase for the benchmark rate during the year.

However, as corporate tax revenues sharply declined after the 2017 tax cuts took effect, the federal budget deficit widened in fiscal year (the period from October 1 through September 30 (the "FY")) 2018 to $779 billion, up 17 percent from the $668 billion deficit in FY 2017. Moreover, the gross national debt increased by more than $2 trillion during the last two years, reaching $22 trillion at the end of 2018.

U.S. stock markets closed out 2018 with their steepest annual declines since the financial crisis, reflecting growing unease among investors about the health of the nearly decade-long bull run. For the year, the Dow Jones Industrial Average was down 5.6 percent, the S&P 500 was off 6.2 percent, and the NASDAQ Composite finished the year down 3.9 percent.

Business Bankruptcy Filings

According to the Administrative Office of the U.S. Courts, business bankruptcy filings during calendar year ("CY") 2018 totaled 22,232, down from 23,157 in CY 2017. Chapter 11 filings declined nearly 5 percent to 7,095 in CY 2018, from 7,442 in CY 2017. Of the CY 2018 chapter 11 filings, 6,078 chapter 11 cases were filed by businesses and 1,017 cases were filed by non-business debtors. The most frequent venues for business chapter 11 filings in CY 2018 were the Southern District of New York (626 cases), the District of Delaware (615 cases), and the Southern District of Texas (453 cases).

One hundred petitions seeking recognition of a foreign bankruptcy proceeding under chapter 15 of the Bankruptcy Code were filed in CY 2018, compared to 81 in CY 2018. The venues with the greatest number of chapter 15 filings in CY 2018 were the Southern District of New York (59 cases) and the Southern District of Florida (20 cases). Four municipal debtors filed for chapter 9 protection in CY 2018, compared to seven in CY 2017.

Research firm Reorg reported that there were 336 chapter 11 filings by companies with at least $10 million in liabilities during 2018, down 4.5 percent from the 352 filings in 2017. Retail filings (consisting of companies in the consumer discretionary and consumer staples sectors) led the pack, with 105 filings, followed by companies in the financial (63 filings), healthcare (45 filings), energy (36 filings), and industrials (35 filings) sectors. Forty-five of those chapter 11 cases (13 percent) were prepackaged or prenegotiated.

Public Company Bankruptcy Filings

According to data provided by New Generation Research, Inc.'s BankruptcyData.com, bankruptcy filings for "public companies" (defined as companies with publicly traded stock or debt) fell for the second year in a row in 2018, with the volume of prepetition assets halving from 2017 to its lowest level since 2013.

The number of public company bankruptcy filings in 2018 was 58, compared to 71 in 2017. At the height of the Great Recession, 138 public companies filed for bankruptcy in 2008 and 211 in 2009.

The combined asset value of the 58 public companies that filed for bankruptcy in 2018 was $52 billion, compared to $106.9 billion in 2017. By contrast, the 138 public companies that filed for bankruptcy in 2008 had prepetition assets valued at $1.16 trillion in aggregate.

Companies in the oil and gas/energy and retail and supermarket sectors led the charge in public company bankruptcy filings in 2018, with 22 percent (13 cases) and 17 percent (10 cases), respectively, of the year's 58 public bankruptcies. Other sectors with a significant number of public filings in 2018 included chemicals and allied products (nine cases), healthcare and medical (five cases), and computers and software (three cases).

Five of the 10 largest public company bankruptcy filings in 2018 (and seven of the 20 largest) came from the retail and supermarket sector. The second-most-represented sector was oil and gas/energy, with two cases in the Top 10 and five in the Top 20.

The year 2018 added 12 public company names to the billion-dollar bankruptcy club (measured by value of assets), compared to 22 in 2017. However, the largest public company bankruptcy filing of 2018—media and entertainment giant iHeartMedia, Inc., with $12.8 billion in assets—did not crack the list of the 40 largest public bankruptcy filings of all time. By asset value, the remaining public companies among the 10 largest bankruptcy filings in 2018 were Sears Holdings Corp. ($7.2 billion in assets); FirstEnergy Solutions Corp. ($5.5 billion in assets); Claire's Stores, Inc. ($2 billion in assets); Southeastern Grocers, LLC (a.k.a. Winn-Dixie, BI-LO, and Harveys Supermarkets) ($1.8 billion in assets); Aegean Marine Petroleum Network Inc. ($1.8 billion in assets); EV Energy Partners, L.P. ($1.6 billion in assets); The Bon-Ton Stores, Inc. ($1.5 billion in assets); Westmoreland Coal Co. ($1.4 billion in assets); and Tops Holding II Corp. ($1 billion in assets).

Twenty-five public and private companies with assets valued at more than $1 billion obtained confirmation of chapter 11 plans or exited from bankruptcy in 2018. Continuing a trend begun in 2012, many more of these companies (19) reorganized than were liquidated or sold.

Seven, or 12 percent, of the 58 public company bankruptcy filings in 2018 were prenegotiated or prepackaged chapter 11 cases, down from 23 percent (16 cases) in 2017.

Territorial and Municipal Debt

The ongoing debt crisis in Puerto Rico continued to grab headlines in 2018. In May 2017, Puerto Rico's oversight board filed a petition under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act in the largest-ever bankruptcy filing by a governmental entity in the United States. Title III filings for several Puerto Rico instrumentalities followed shortly afterward. The filings ignited new rounds of litigation with Puerto Rico's bondholders, which collectively hold more than $74 billion of Puerto Rico's $144 billion in debt. The commonwealth's financial woes have been compounded by the damage and humanitarian crisis wrought in 2017 by Hurricane Maria, from which the island territory has yet to recover.

In June 2018, the Puerto Rico Sales Tax Financing Corporation (known as COFINA) reached a milestone settlement with municipal bondholders and other creditors regarding claims to roughly $18 billion in pledged Puerto Rico sales tax collections. The settlement was ultimately incorporated into a plan of adjustment for COFINA that was confirmed by the court on February 4, 2019.

Puerto Rico and its creditors also reached an out-of-court agreement in 2018 to restructure approximately $4 billion in debt issued by the commonwealth's Government Development Bank.

The City of Detroit exited decades of state financial oversight in 2018, a development indicating that the city has made strides toward reversing the long economic and fiscal decline that propelled it into the largest municipal bankruptcy filing ever. Detroit filed its chapter 9 case in 2013 and obtained confirmation of a plan of adjustment in 2014 that eliminated more than $7 billion in debt. Established in 2014 to monitor the Motor City, Detroit's Financial Review Commission voted unanimously in April 2018 to end its oversight of a city that has been under some form of outside supervision since 1975. With its landmark reorganization, Detroit arrested a downward spiral that resulted from decades of population loss, declining tax revenue, and the disappearance of automobile-industry jobs.

Banks

In a development last seen in 2006, the Federal Deposit Insurance Corporation did not shutter any banks in 2017. By comparison, there were 140 bank failures in 2009 and 157 in 2010, during the height and immediate aftermath of the Great Recession.

Notable Business Bankruptcy Rulings in 2018

Appeals—Mootness

In bankruptcy cases, appellees...