Business bankruptcy happens to businesses for a variety of reasons. Since 2014, business bankruptcy filings have steadily increased until they peaked in 2016, with businesses only seeing a reduction in 2017. Even though 2017 saw a decrease in the number of total filings each quarter, business bankruptcy rose .2% overall since 2016 when business bankruptcy sharply increased to 26% higher than 2015’s results.
The Service sector experienced a slight reduction of business bankruptcy filings at 27.46% of total filings from 27.86% in 2016, with healthcare accounting for a significant portion of filings. This number is down from 34.7% in 2015 and 41.4% in 2013.
Conversely, Retail, Finance, Insurance, and Real Estate sectors experienced a continued increase in filings. Nearly 99% of bankruptcy filings were voluntary with Chapter 11 making up 56% and Chapter 7 making up 42% of all business bankruptcies in 2017.
In 2017, public company bankruptcies went through a significant reduction by 28%. These were significantly down in comparison to 2016 but slightly higher than 2015. In spite of this, the total public company combined prepetition assets increased somewhat. This can be attributed to the Chapter 11 business bankruptcy filings done by Seadrill Limited ($21.7 billion) and Walter Investment Management Corp. ($16.8 billion).
The Commonwealth of Puerto Rico holds the largest “bankruptcy” in 2017 when it defaulted on $73 billion in debt. Since bankruptcy law does not include unincorporated territories, Congress had to pass a statute called the “Puerto Rico Oversight, Management and Economic Stability Act” (PROMESA) to allow the restructuring of Puerto Rico’s debt.
Overall, California generated the most business bankruptcies in 2017 at 15.18% of all filings, up from 13.36% in 2016. Texas held second place with 12.54% of total bankruptcies. New York came in third with an increase from 8.11% in 2016 to 9.77% in 2017. Florida went from 7.53% in 2016 to nearly 8.05% of all bankruptcy filings. Texas experienced a decrease in total bankruptcies while the other three had an increase.
These four states make up more than 50% of total bankruptcy filings by state with California and Texas holding the top two spots since 2015. The last six states rounding out the top ten include: Georgia, Illinois, New Jersey, Pennsylvania, North Carolina, and Maryland.
The greatest increase from 2016 to 2017 was experienced by Florida at 1.0%, New York at 2.0%, and California at 2.0%. The greatest decrease from 2016 to 2017 was seen by Massachusetts at 1.0%, Oklahoma at 1.0%, and Missouri at 3.0%.
Even though in Q4, Finance, Insurance, and Real Estate sectors accounted for 27.94% of total bankruptcies, the end of the year resulted in 20.34% of total business bankruptcies in 2017, which significantly increased from 16.07% in 2015 and 12.0% in 2013. Finance services accounted for 7.33% of the total (20.3%) bankruptcies in the Finance, Insurance, and Real Estate Industry.
In 2017, the Insurance industry suffered record losses due to natural catastrophes like Hurricanes Irma and Harvey. Respectively, reinsurers were prepared with significant capital buffers provided by investors and only experienced approximately a 5% loss.
Real Estate and agents/managers attributed to 25.09% of the total filed bankruptcies in the Finance, Insurance, and Real Estate sectors. Figures accounting for 21.14% of the industry’s total filings include “Lessors of Real Property, Not Elsewhere Classified and Investors, Not Elsewhere Classified.”
Retail bankruptcies grew from 11.28% in 2015 to 14.85% in 2017. Increased online sales success, discount chains, and an ongoing change in consumer demographics and preferences are partly behind the necessary financial restructurings in the retail industry.
Major retailers, like BCBG, HHGregg Inc., Gymboree, and Toys R Us were forced to file for bankruptcy in 2017. Thousands of brick-and-mortar retail stores shut down in an attempt to lower expenses and compete with online retailers, thus also negatively impacting the commercial real estate business.
The Energy and Mining industries are responsible for 29.6% of the prepetition public bankruptcy filings. This total is down from 41% in 2016. Four of the companies (including the two above) in the top ten largest Chapter 11 filings were Energy-related businesses, in comparison to eight in 2016. Wavering energy prices have given way for the instability in these sectors, resulting in liquidity issues for several oil and gas companies.
This especially impacted exploration and production (E&P) corporations since they depend on reserve-based loans for funding. As a result of declining oil prices, several E&P companies filed Chapter 11 bankruptcy in 2016 and 2017. Oil prices rebounded in September 2017 causing filings to level off in the last quarter of 2017.
Construction generated 8.25% of the overall business filings in 2017, an increase from 8.19% in 2016 and 7.94% in 2015. Manufacturing has seen a decrease from 10.78% in 2015 and 10.92% in 2016 to 9.74% in 2017.
Reports indicate small businesses generating less than $500,000 in sales accounted for 60.6% of business bankruptcy filings in 2017, rising from 51.3% in 2016. Nearly 79.6% of business bankruptcies were filed by companies with less than 20 employees, meaning small business bankruptcy filings accounted for the bulk of all filings.
It is projected business bankruptcy filings will continue to level off as the economy continues to experience growth in conjunction with rising interest rates and a Retail sector struggling to make it. Even though many sectors experienced a reduction in financial distress, reports indicate public company bankruptcies may remain at higher levels than usual in the upcoming years.
In addition to market changes in several sectors, the reasons for the continued increase are the 2009 debt and nearly $1.5 trillion of lower quality corporate debt is due over the next five years. It is expected much of this will be restructured through Chapter 11 bankruptcy filings.
Some of this debt will not be eligible for refinancing, which will cause a domino effect of additional bankruptcy filings. Businesses experiencing financial hardship should consult with a reputable business bankruptcy attorney to discover all available options.
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