Pandemic Continues to Force Businesses to Explore Bankruptcy
- 9 Mins
As the country starts to reopen, businesses need to take swift action to roll out a reopening plan. For many commercial businesses in industries like travel and hospitality, this will be difficult because there is no road map detailing how to successfully emerge from a pandemic. While some companies will reopen, others will close their doors permanently. In fact, some companies have already commenced bankruptcy proceedings or outlined other out of court options. Those businesses that reopen, will still face an uncertain future because it is unlikely that revenue will immediately bounce back to pre-COVID 19 levels. With consumers still feeling uncomfortable with out-of-home activities, capacity restrictions at restaurants and many still afraid to travel, there will be significant stress on businesses for some time.
2020 Bankruptcy Filing Statistics
Chapter 11 bankruptcy filings in the commercial sector were up 48% this past month compared to the numbers from May 2019. Even more significant, between April and May 2020 these bankruptcy filings raised 30% with 165 new filing petitions. These numbers are not surprising due to the way COVID-19 has rocked the economy. Now it is just a waiting game to see which industries will bounce back the fastest and which will see high rates of bankruptcy filings.
Restaurant Chain Bankruptcy Filings
The restaurant industry has suffered the most sales and job losses since COVID- 19 began. According to the National Restaurant Association, the industry will suffer losses of over $240 billion dollars by the end of 2020. With indoor dining still prohibited or restricted in some states, many restaurants have had to transition to outdoor dining, curbside pickup, and delivery services only. Restaurants that can offer inside dining are operating at a reduced capacity with social distancing and hygiene rules enforced. For many restaurants, this has meant a reduction in revenue of up to 80%.
Independent, mom & pop type restaurants have been hit the hardest and many have closed their doors or have been forced to file bankruptcy. Big chains have not been immune either. In fact, many chains were already struggling because of changes in consumer eating patterns and there were a number of restaurant chains that filed for bankruptcy pre-pandemic including Kona Grill, Bar Louie and Granite City Food & Brewery which both filed for Chapter 11 in late 2019.
Some chains have already set their bankruptcy plans in motion. Garden Fresh Restaurants filed for Chapter 7 bankruptcy on May 14, 2020 and will shut down all 97 stores and liquidate their business. Garden Fresh was a self-service chain known for its 50-foot salad bar, soups, pastas, breads, and desserts. However, given the COVID-19 pandemic and increased safety concerns from consumers, the company found it difficult to continue operations.
The FDA recommended that restaurants discontinue operations “such as salad bars, buffets, and beverage service stations that require customers to use common utensils or dispensers.” Buffet concept restaurants that offer a lot of fresh options, will either have to change their model or close their doors, because it will be impossible to comply with current FDA safety recommendations.
BarFly Ventures, which is the parent company for HopCat – a popular Michigan restaurant chain – was hit hard due to the state’s high number of coronavirus cases. They filed for Chapter 11 on June 3, 2020 and have a reorganization plan in motion, which includes restarting operations shortly in most of their locations in Michigan and Midwest locations but walking away from restaurant that were unprofitable before the pandemic hit.
CraftWorks Holding – parent company for Logan’s Roadhouse and others – has been entangled in bankruptcy proceedings since March 3, 2020. They are working to reorganize the company, but they have had to close many locations when the pandemic hit. An unidentified lender has recently agreed to purchase CraftWorks and plans to reopen approximately 150 of the company’s 261 locations. Le Pain Quotidien has found itself in a similar situation, recently selling to Aurify Brands after filing for bankruptcy protection.
Hotels, Events, and Entertainment Bankruptcy Filings
Besides restaurants, other parts of the hospitality industry have been adversely affected by the pandemic due to travel restrictions across the country. While hotels have been hit hard, when people begin to travel again for business as well as pleasure, hotels should begin to bounce back. It will take a while for hotels to rebound to pre-COVID 19 levels and operators will need to entice travelers with incentives and discounts which could affect their bottom line. Distancing guidelines will also impact revenues because hotel restaurants, spas, and private events will have to adhere to reduced capacity rules.
The human toll has been significant. According to surveys conducted by the American and Hotel and Lodging Association, 9 out of 10 hotels have laid off or furloughed workers and only 35% have been able to rehire employees through the economic relief measures such as the Paycheck Protection Program. Most hotels are operating at less than 50% of pre-COVID19 levels and they don’t expect to return to pre-COVID19 levels until 2021. Big hotel chains will probably be able survive by shuttering underperforming properties, closing floors along with food and beverage outlets while continuing to tap into emergency funds or lines of credit. Unfortunately, if travel does not bounce back quickly, some hotels might face foreclosure.
For smaller travel businesses, like bed and breakfasts, boutiques, or travel companies, turning to bankruptcy can offer more solutions to help reorganize or shut down altogether before sustaining greater losses. In regards to travel companies, while AirBnB struggled when the pandemic first hit and had to lay off 1/4 of their workforce, they seem to be doing better for now and have experienced increased bookings within the U.S. due to lifted restrictions across the country. If will be interesting to see who fares better post-pandemic: hotels or vacation rental companies? It will likely come down to who offers the best cancellations policies and which proprieties travelers believe have the best hygiene and cleaning practices.
Other hospitality businesses like spas, movie theatres, country clubs, and event venues are also experiencing economic hardships from the pandemic. Capacity restrictions decreases the amount of potential revenue. With unemployment at double digit numbers and fear reintegration into normal activities, consumers will likely cut back on discretionary spending and may not be ready to splurge on luxuries. For example, AMC theaters, the largest movie chain in the U.S., recently warned that it might not survive the fallout from the coronavirus pandemic.
The company issued the warning in a public filing, saying that “the crisis has significantly undermined its finances and introduced profound uncertainty about its future.” This warning doesn’t necessarily mean that AMC will go out of business. It is possible they could file for Chapter 11 bankruptcy and emerge as a sustainable business.
Florida movie theater company CMX filed for Chapter 11 in April citing the pandemic as the main reason for the filing. CMX warns that the movie theater industry will not be able to survive without some type of economic rebalancing that involves movie studios taking a lower percentage of ticket revenue and landlords providing more favorable terms. Amusement and theme parks are also suffering. Apex Parks Group, an amusement park operator in California, filed for Chapter 11 protection in April and was recently approved for a sale to its lenders. These instances are the tip of the iceberg and the full impact of COVID 19 on leisure companies is yet to be realized.
It is no shock that the COVID-19 pandemic has hit the restaurant, hospitality, and leisure industries like a tidal wave. Now that most states and cities are moving into various phases of reopening, we will start to see who can survive and who will not. Many of these companies will likely have to reorganize either in or out of court. For many, the Chapter 11 process will help them to restructure and continue to operate. For others, the losses will be too great and they will have to close their doors permanently. Tapping into outside resources, like bankruptcy attorneys and consultants, can help businesses navigate the bankruptcy process and formulate a solid go forward plan.
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The contents of this article are intended to convey general information only and not to provide legal advice or opinions.