The Year in Bankruptcy: 2016
The watchword for 2016 in much of the world was "upheaval." Two unanticipated events dominated the political, business, and financial headlines of 2016, at least in Europe and the Americas: the Brexit referendum result and the election of Donald J .Trump as the 45th President of the United States. The refugee crisis, the commodities meltdown, Brazil’s economic collapse, China’s growing pains, Russian belligerency and alleged cyber-meddling in the U.S. election, the war on terrorism, and the beginning of the end of the bloody Syrian civil war seemed to pale by comparison.
Another Good Year for the U.S.
All things considered, 2016 was another good year for the U.S., with modest growth in the economy (approximately 2 percent); only a slight increase in the fiscal-year budget deficit ($587 billion); persistently low inflation (approximately 1.7 percent); a strong dollar (at a 14-year high compared to most major currencies); and, until it increased slightly at the end of December to 4.7 percent, the lowest unemployment rate since August 2007. These developments prompted the U.S. Federal Reserve on December 14 to raise its benchmark interest rate for the second time since December 2008.
A gold star for 2016 went to the U.S. auto industry. Seven years after Big Three automakers General Motors and Chrysler filed for chapter 11 protection with a decidedly bleak outlook, U.S. automakers had another banner year—U.S. light-vehicle sales hit a second consecutive annual high, assisted by a fourth-quarter surge in demand that exceeded expectations and bolstered the outlook for an industry that has been a key engine for economic growth.
Commodities and the Shipping News
The other big stories in the turbulent business, financial, and economic narrative of 2016 included a continuing commodities meltdown precipitated by weak demand (principally from China) and, until the Organization of the Petroleum Exporting Countries (OPEC) finally agreed to slash oil production in November, rock-bottom prices for oil, gas, coal, and minerals, all of which sent hundreds of overleveraged U.S. and foreign producers and related companies scrambling down the road to bankruptcy. The year ended on a good note for oil producers. After plummeting to a 12-year low in January, the price of crude oil rebounded more than 50 percent by year-end.
Years of spending on bigger and bigger state-of-the art container ships and of rock-bottom spot cargo rates took a heavy toll on the shipping industry in 2016. In January, Hyundai Merchant Marine negotiated an almost unprecedented reduction in daily hire rates for long-term charters as part of the South Korean carrier’s restructuring. Hanjin Shipping collapsed under a mountain of debt and was forced to apply for court receivership at the end of August, leaving 100 ships and $12 billion in goods stranded around the world. Even industry-leading Maersk Line saw its profit from 2015, which had totaled $1.3 billion, reverse into a loss in 2016. Turmoil in the industry spurred a rash of consolidations. These developments overshadowed other notable events in 2016, such as the opening of the enlarged Panama Canal in June.
Another Good Year for M&A
M&A had a big year in 2016, despite resistance from government regulators due to antitrust and other concerns. Takeovers totaling $3.84 trillion were announced globally in 2016, according to Dealogic. Although that represents a decline of approximately 18 percent from 2015’s record of $4.66 trillion, it still makes 2016 the fourth-most-active year for M&A. There were 28 transactions valued at $10 billion or more in 2016, compared with 44 the year before. Those deals included AT&T Inc.’s agreement in late October to buy Time Warner Inc. for $85 billion (the largest deal of 2016), British American Tobacco p.l.c.’s $47 billion bid for the stake of Reynolds American Inc. that it does not already own, chipmaker Qualcomm Inc.’s agreement to pay roughly $39 billion for NXP Semiconductors NV, and the December 20 announcement by industrial-gas giants Praxair Inc. and Linde AG that they would merge in a deal that would create a company valued at $67 billion.
The year 2016 was also the biggest ever in terms of the volume of collapsed deals, with more than $500 billion of previously announced deals withdrawn, due in part to antitrust or other government scrutiny directed principally toward corporate "tax inversions." Among the deals that fell apart was Pfizer Inc.’s $150 billion proposed deal for drugmaker Allergan plc, oilfield-service giant Halliburton Co.’s $35 billion proposed combination with Baker Hughes Inc., and Office Depot Inc.’s bid to merge with Staples Inc.
Sovereign and Commonwealth Debt
A resolution of the sovereign debt crisis of Argentina and legislation designed to alleviate the calamitous financial straits of a U.S. commonwealth—Puerto Rico—figured prominently in 2016 headlines. Argentina returned to global debt markets after a 15-year absence on April 19, 2016, when it sold $16 billion in bonds to fund a series of landmark settlements reached in February with holdout bondholders from the South American nation’s 2005 and 2010 debt restructurings. This resolution of the more than decade-long battle between Argentina and the holdouts—led by hedge funds Aurelius Capital Master Ltd. and NML Capital Ltd.—provided an unlikely, albeit welcome, dénouement to a story that had long captivated the international community.
Puerto Rico has been struggling for several years to manage more than $72 billion in bond debt. However, because the island commonwealth is a U.S. territory, its heavily indebted public corporations had been precluded from seeking the debt-adjustment relief that is available to most state public agencies under chapter 9 of the U.S. Bankruptcy Code. A new mechanism for providing debt adjustment was implemented in 2016, shortly after the U.S. Supreme Court upheld lower court rulings declaring unconstitutional a 2014 Puerto Rico law, portions of which mirrored chapter 9, that would have allowed the commonwealth’s public instrumentalities to restructure a significant portion of their debt. On June 30, 2016, President Obama gave his imprimatur to the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). The law established, among other things, an oversight board entrusted with determining the adequacy of budgets and fiscal plans for the instrumentalities of Puerto Rico. It also created a mechanism to implement voluntary out-of-court restructuring agreements between an instrumentality and its bondholders, as well as bond debt-adjustment plans (consensual and nonconsensual) in a case commenced in federal district court.
U.S. stock markets had a very good year in 2016. The Dow Jones Industrial Average shrugged off its worst-ever yearly start to record its best performance since 2013. The index of 30 blue-chip stocks gained 13 percent in 2016. The Dow closed above 19,000 for the first time ever on November 22, gained nearly 8 percent after the U.S. election, and flirted with 20,000 before closing at 19,744. The Standard & Poor’s 500 gained 9.5 percent in 2016, and the technology-heavy NASDAQ Composite added 7.5 percent—their biggest gains since 2014. The 2016 rally extended a bull market that tripled the Dow from its low of 6547.05 during the financial crisis in March 2009.
Business Bankruptcy Filings
Business bankruptcy filings, other than chapter 11 filings, continued a downward trend in fiscal year ("FY") 2016, but the volume of business filings increased during the calendar year ("CY"). The Administrative Office of the U.S. Courts reported that business bankruptcy filings in FY 2016, which ended on September 30, 2016, totaled 24,457, down 2 percent from the 24,985 business filings in FY 2015. Chapter 11 filings, however, totaled 7,450 in FY 2016, a 5.8 percent increase from the 7,040 chapter 11 filings in FY 2015.
One hundred fifty chapter 15 cases were filed in FY 2016, compared to 74 in FY 2015. There were five chapter 9 filings in FY 2016, compared to seven in FY 2015.
According to Epiq Systems, total business bankruptcy filings during CY 2016 were 37,771, a 26 percent increase from the 29,920 filings for CY 2015. There were 5,438 business chapter 11 filings during CY 2016, a 2 percent increase over the 5,313 business chapter 11 filings in CY 2015.
One hundred eighty chapter 15 petitions were filed on behalf of foreign business debtors in CY 2016, compared to 90 in CY 2015—a 100 percent increase. Only six municipal debtors filed for chapter 9 protection in CY 2016, compared to three in CY 2015.
The number of bankruptcy filings by "public companies" (defined as companies with publicly traded stock or debt) in CY 2016 was 99, according to data provided by New Generation Research, Inc.’s bankruptcydata.com, compared to 79 public company filings in CY 2015. At the height of the Great Recession, 138 public companies filed for bankruptcy in CY 2008 and 211 in CY 2009.
The combined asset value of the 99 public companies that filed for bankruptcy in 2016 was $104.6 billion, compared to $81.2 billion in 2015 and $72 billion in 2014. By contrast, the 138 public companies that filed for bankruptcy in 2008 had prepetition assets valued at $1.16 trillion in aggregate. In 2016, oil and gas, energy, and mining sector companies once again led the pack, representing 40 percent of the total public company bankruptcy filings in 2016. Eight of the 10 largest public company bankruptcy filings in 2016 were made by companies in the oil and gas, energy, and mining sectors. During the past two years, more than 80 public companies operating within these sectors filed for bankruptcy protection, with 30 of those petitioners listing more than $1 billion in prepetition assets. Other sectors with a significant number of public filings included retail (five filings), healthcare and medical (four filings), chemicals and allied products (four filings), and steel and metals (three filings).
The year 2016 added 25 public company names to the billion-dollar bankruptcy club (measured by value of assets), compared to 19 in 2015 and 11 in 2014. However, the largest bankruptcy filing of 2016—solar-energy company SunEdison Inc., with $11.5 billion in assets—did not even come close to cracking the Top 30 List of the largest public company bankruptcy filings in history.
Twenty-four public and private companies with assets valued at more than $1 billion exited from bankruptcy in 2016—including 11 of the 25 billion-dollar public companies that filed in 2016. Continuing a trend begun in 2012, more of these companies (19) reorganized than were liquidated or sold.
Banks and Pension Insurance
The Federal Deposit Insurance Corporation shuttered five banks in 2016, compared to eight in 2015 and 18 in 2014. This represents the lowest number of bank failures since 2007. There were 140 bank failures in 2009 and 157 in 2010, during the height and immediate aftermath of the Great Recession.
On November 16, the Pension Benefit Guaranty Corporation (the "PBGC"), which insures pensions for approximately 40 million Americans, reported that its deficit increased 3.9 percent to $79.4 billion, with the agency’s program for multi-employer pension plans continuing to account for a large share ($58.8 billion). PBGC’s single-employer insurance program improved during FY 2016—the deficit narrowed from $24.1 billion at the end of FY 2015 to $20.6 billion at the end of FY 2016. The combined deficit reported for FY 2016 was the widest in the 42-year history of the PBGC, which has now run shortfalls for 14 straight years. In its most recent Projections Report, PBGC estimated that its multi-employer program will run out of money by the end of 2025, and there is considerable risk that it will run out even sooner.
According to Standard & Poor’s Ratings Services, 162 companies worldwide defaulted on their obligations in 2016, the highest year-end figure since 2009, when the default figure hit 268. Up more than 40 percent from 2015, when there were 113 global defaults, this tally made 2016 the worst year for corporate stress since the height of the global financial crisis.
Two-thirds of 2016’s global defaults came from U.S. borrowers (106), up from 59 percent in 2015. After the U.S., companies from emerging markets (Brazil and Russia) were the second-largest defaulters (31), followed by companies in Europe (14) and other developed nations, including Australia, Canada, Japan, and New Zealand (11). The oil and gas sector led the 2016 default tally with 66 defaulters, or 40 percent of the global total, followed by the metals, mining, and steel sector with 18 defaults, or 11 percent.
Of the 162 defaulting entities in 2016, 60 defaulted because of missed principal/interest/coupon payments, approximately one-third of the defaults were due to distressed debt exchanges and out-of-court restructurings, and 29 followed bankruptcy filings. The remaining defaults were due to "confidential" reasons, de facto restructurings, deferred interest payments, debt moratoriums, debt acceleration, judicial reorganization, and regulatory intervention.
Distressed Debt and Bankruptcy Restructuring
According to Thomson Reuters, completed distressed debt and bankruptcy restructuring activity during 2016 totaled $346.5 billion globally, a 121.4 percent increase from 2015. The number of completed deals also increased, with 336 deals during 2016, compared to 271 during 2015. The two largest completed transactions during 2016 were the $40.3 billion debt restructuring of Energy Future Holdings Corp. ("EFH") and the $33 billion spinoff of EFH’s competitive businesses to its shareholders. Completed deal activity in the U.S. totaled $183.9 billion during 2016, a more than threefold increase from 2015. There were 124 restructuring transactions completed in the U.S. during 2016, 47 more deals than completed in 2015. The energy and power sector accounted for 63 percent of the U.S. debt restructuring market. The media and entertainment sector followed, with a 19 percent share.
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