(Bloomberg)—The spreading coronavirus has already begun hurting the most vulnerable companies: those in bankruptcy or teetering on the edge.
Retailers like furniture seller Pier 1 Imports Inc. (No. 121 in the 2019 Digital Commerce 360 Top 1000) and direct-mailer Bluestem Brands Inc. have pointed to virus woes in justifying their requests for court protection, while cash-strapped energy companies—already reeling from an oil market sell-off—are seeing the pandemic disrupt long-standing restructuring plans.
Patient zero for the insolvency world may have been publicly traded Valeritas Holdings Inc., a bankrupt seller of diabetes devices that said in early February the shutdown of factories in China pressured its supply chain, worsening an existing cash crunch. The company plans to sell itself for just $23 million, citing uncertainty surrounding when workers in rural China will return to factories among its many problems.
“Given the commercial reaction to the virus and the wheels of the economy slowing at this pace, the implications will be wide-reaching and long term,” Duston McFaul, a partner in the bankruptcy practice at Sidley Austin LLP in Houston, said in an interview. “Credit and lending markets are all taking a step back to gauge the implications and to know how to react.”
The Chinese factories that produce so much of the world’s goods—including Valeritas’ V-Go Insulin device—are beginning to reopen, but empty store shelves will likely become a common sight in the coming months.
The virus will “likely have some effect on inventory levels for the foreseeable future,” Pier 1 CEO Robert Riesbeck said in court papers last month when the company filed for Chapter 11 protection from creditors.
Industries reliant on crowds like restaurants, retail and hotels will likely see an impact from the virus and could be forced to dismiss employees or cut their hours, said Sidney Scheinberg, chair of the bankruptcy and creditors-rights arm of Godwin Bowman PC in Dallas. Restaurant chains are already under pressure from rising wages and third-party delivery service competition.
In some cases, the virus helped finish off companies that were headed for court anyway. Foresight Energy LP, the newly bankrupt coal miner, said in its court papers this week that its prospects were hurt when COVID-19 weakened the economy and demand for coal. Foresight had been in trouble for some time, though: it suspended its quarterly dividend in May and missed an interest payment in October.
An attorney for Dean Foods Co., the top U.S. milk processor that went bust in November, told a bankruptcy judge in Houston Thursday the company is getting calls from schools across the country to take back milk deliveries in the wake of virus-related closings. Dean would lose millions of dollars each month if its school food service business dries up, Brian Resnick of Davis Polk & Wardwell LLP said, because schools account for such a large portion of the company’s milk sales.
The pandemic is hitting deal financing, too. Art Van Furniture LLC, which filed for bankruptcy last week, was closing in on an out-of-court cash infusion when the virus crushed equities markets, helping the deal fall apart, Chief Financial Officer David Ladd said in a court declaration. Elsewhere, a proposed $320 million sale of bankrupt Alta Mesa Resources Inc. assets is in doubt because the buyers say they can’t line up the promised financing amid the virus-induced market turmoil.
That makes Houston-based EP Energy Corp. look like one of the lucky ones. The oil and gas producer disclosed its bankruptcy plan back in October, well before coronavirus was making headlines. Creditors fighting the driller’s proposal argued earlier this month that the pandemic could tamp down demand for oil in the longer term, and that the company’s plan to keep at least $1.5 billion of debt on its books wasn’t feasible.
Judge Marvin Isgur ultimately approved the plan. Three days later, oil prices crashed.
“I know that we’ve got problems out there and I don’t know how to deal with them,” Isgur said in a hearing Wednesday, where he confirmed he’ll sign a court order enforcing his earlier ruling. “I’m just going to be prepared to deal with them the best I can.”Favorite