Bankruptcies Decline For 6th Consecutive Year - California & Service Industry Lead Filing Counts

by: George Putnam

Summary

2015's business bankruptcy figure is approximately 1/3 2009's count.

Mining industry saw a huge leap in bankruptcies.

Key indicators for a bankruptcy uptick have already begun to appear.

According to New Generation Research, overall number of corporate bankruptcies nudged up slightly in the 4th quarter of 2015 compared to Q3 but was slightly below the Q2 and Q1 2015 filing levels. Q4 2015 marked the fifth straight quarter where filing levels have remained remarkably consistent, with filing levels varying by no more than 4% from quarter to quarter during that stretch. The average number of monthly business bankruptcy filings in the 2nd half of 2015 was only 1.6% higher than the average for the first six months of 2015.

Quarter

Q4 2015

Q3 2015

Q2 2015

Q1 2015

# of Bankruptcies

7,418

7,355

7,629

7,437

Click to enlarge

Despite that consistency over the last 5 quarters, 2015 marked the sixth consecutive year that the annual business bankruptcy figures have declined. We saw 13.7% fewer business bankruptcies in 2015 than in 2014. The 2015 bankruptcy figure is approximately 1/3 the 2009 figure. The chart below reflects the rapid decline of bankruptcies over the last six years and the slowdown of that decline from 2014 to 2015:

% Decline of Bankruptcies 2014 to 2015

% Decline of Bankruptcies 2013 to 2014

% Decline of Bankruptcies 2012 to 2013

% Decline of Bankruptcies 2011 to 2012

% Decline of Bankruptcies 2010 to 2011

% Decline of Bankruptcies 2009 to 2010

13.72%

21.62%

23.62%

22.20%

19.23%

2.70%

Click to enlarge

The bankruptcy situation for public companies was completely different, however, as the number of public company bankruptcies jumped 46% from 54 in 2014 to 79 in 2015, primarily driven by surging energy sector filings. The 2015 crop of publicly traded filings includes six with assets above $3 billion compared to only two the previous year. Similarly, there were 19 bankruptcies with assets over $1 billion in 2015 versus 11 a year ago. As the chart below reflects, eight of the ten largest Chapter 11's were initiated by companies in the Oil & Gas, Mining and related sectors-and a remarkable 51% of 2015's total public bankruptcies came from those industries.

Largest Public Chapter 11 Bankruptcies of 2015

Company

Bankruptcy Date

Description

Assets ($Mils)

Caesars Entertainment Operating Co. Inc.

01/15/15

Operates Hotels & Casinos

$15,973

Alpha Natural Resources, Inc.

08/03/15

Coal Supplier & Mining Operator

10,736

Doral Financial Corporation

03/11/15

Bank Holding Company

8,493

Samson Resources Corporation

09/16/15

Independent Oil & Gas Co.

5,608

Walter Energy, Inc.

07/15/15

Produces & Exports Coal

5,386

Offshore Group Investment Limited

12/03/15

International Offshore Drilling Co.

3,507

Molycorp, Inc.

06/25/15

Rare Earth Materials Mining

2,576

Sabine Oil & Gas Corporation

07/15/15

Independent Oil & Gas Co.

2,438

Swift Energy Company

12/31/15

Independent Oil & Gas Company

2,173

Patriot Coal Corporation

05/12/15

Coal Producer & Marketer

2,072

Click to enlarge

Getting back to overall business bankruptcy trends, California once again generated the largest percentage of overall bankruptcies with 15.30% in Q4 and 13.31% for the full calendar year. California was followed by Texas, which leap-frogged over New York and Florida as the state that generated the 2nd highest percentage of overall bankruptcies for the year. Virginia and Texas saw the largest percentage year-to-year leap in overall percentage of bankruptcies while New Jersey and Florida saw the largest decrease. The Q4 and full year Bankruptcy Court activity reflects California Central generating the largest percentage of overall bankruptcies by a large margin, which has historically been the case. The 3.63% of overall bankruptcies generated within Puerto Rico's Bankruptcy Court in Q4 2015 reflects the economic challenges that territory is experiencing.

Free Bankruptcy Report

The Service industry, our economy's largest employer, generated the largest percentage of overall bankruptcies in Q4 2015 with 32.08% and 34.70% for the full year. The 2015 percentage is down 7% from that industry's 2014 figure and down 16% from 2013. The slack has been picked up by the Finance, Insurance and Real Estate industry which saw its full year percentage jump 34% since 2013. Though not showing up in the top five in terms of percentage of overall bankruptcies, the Mining industry saw a huge leap in filings generating 6.17% of overall bankruptcies in 2015; this figure compares to 1.36% in 2014 and 0.42% in 2013. This sector continues to feel the effects of low fuel and natural gas prices.

Low interest rates, a robust capital market with easy access to financing, out-of-court settlement alternatives, a slightly improving economy, the perceived cost of filing for bankruptcy and tighter bank lending decisions have driven the number of bankruptcy filings down over the last six years. Additionally, the recession eliminated many of the troubled companies, so the remaining relatively healthy businesses are able to borrow with little fear of raising rates keeping the filing rates down.

How long will the bankruptcy filing numbers stay down? That is anybody's guess, but we do feel the number of business bankruptcy filings has indeed leveled and will stay at this level for a bit; however, there are plenty of factors out there indicating that an overall increase in business bankruptcies may not be too far off. Interest rates are rising, albeit slowly, but eventually they will get to the point where they will prevent the small to mid-sized business owner from taking on more debt and bankruptcy will have to be considered. A couple of speed bumps in the overall economy could also push filings right back up again. We are certainly seeing this in the public company sector where falling oil prices, volatility in China, shrinking world trade, rising debt and weak corporate loans resulted in a 46% increase in bankruptcies in 2015. In short, those key indicators that could bump up bankruptcies have already begun to appear, which means 2016 could be an interesting year in the corporate bankruptcy sector.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.