Business Bankruptcy Filings Continue To Decline, Will The Trend Continue?

by: George Putnam

Summary

Q1 2015 bankruptcy analysis reveals that the filing count continues to reflect the lowest total since at least 2006.

Until recently, public company Chapter 11s—which make up a very small percentage of overall filings—have also experienced a significant slowdown.

In terms of geography, California, Illinois and Texas, respectively, generated the largest percentage of total business bankruptcies.

New Generation Research just released its Quarterly Report of Business Bankruptcy Filings for the period ending March 31, 2015. A quick summary is provided here, and you can view the full statistical analysis in this free bankruptcy report.

The downward spiral of business bankruptcies continued in the first quarter of 2015 with 3% fewer business bankruptcy filings than in Q4 2014 and 19% fewer than in Q1 2014. Q1 2015's filing count continues to reflect the lowest business bankruptcy total since at least 2006 when filings spiked as the U.S. entered the recession in 2007. Those numbers have steadily declined since.

Until recently, public company bankruptcy filings-which make up a very small percentage of the overall filings number-have also experienced a significant slowdown. During the first quarter of 2015, however, we saw that trend reverse with 26 public Chapter 11 bankruptcies. This spike represents a 136% jump over Q1 2014's meager 11 public company filings. Q1 2015's quarterly count represents the greatest number of filings for this same time period since 2010's 27.

Not only did the number of public bankruptcies surge during the most recent quarter, so did the size of those companies: Q1 2015's public petitioners held $24 billion in combined pre-petition assets-nearly 4X the amount seen in the same period last year. This is the highest quarterly asset total since 2009's staggering $100 billion. If the current pace continues for the remainder of 2015, we will experience the greatest number of public filings and related assets seen since 2010.

Returning to overall business filing statistics, small businesses continued to dominate the bankruptcy count, as has been the case historically. Nearly 80% of Q1 2015's bankruptcies were filed by companies with $2.5 million or less in gross sales volume. This figure is slightly higher than Q4 2014's 74%. Also consistent with historical trends, the Service industry was hardest hit, generating 42% of all Q1 2015 business bankruptcy filings. The Finance, Insurance and Real Estate sector was the second most frequent petitioner, with 14% of the business bankruptcy activity. These same industries also dominated Q4 2014's business filing count with respective 35% and 18% shares.

In terms of geography, California, Illinois and Texas, respectively, generated the largest percentage of total business bankruptcies, collectively accounting for more than a third of all U.S. Bankruptcy Court activity in Q1 2015. Illinois saw the largest gain in activity-rising nearly six percentage points from Q1 2014, driven primarily by the filings of casino giants Caesars, Harrahs, Showboat and Horseshoe, each of which filed in the Northern District of Illinois. Historically, the states with the greatest percentage of business bankruptcies include California, Delaware, Florida, New York and Texas.

The decline in overall business bankruptcies can be attributed primarily to sustained low interest rates for business borrowers coupled with the perceived high costs associated with a bankruptcy filing. These factors have pushed businesses to consider out-of-court alternatives. Additionally, many of the really troubled businesses have already closed as a result of the recession, leaving relatively healthy businesses with the ability to borrow money at low interest rates and maintain that business without the pressures of rising interest rates.

Will the declining business bankruptcy trend continue? Most experts feel that low interest rates will keep the numbers down...in the short term anyway. Lenders have been, for the time being, more willing to pursue some sort of out-of-court restructuring, with the rationale that a marginally-performing loan can be acceptable if revenues are covering operations. However, having said that, there are several factors that could lead to an eventual increase in bankruptcies.

Interest rates have been gradually rising since 2012 when they hit a historic 200-year low and they will continue to rise moving forward. Large amounts of high yield debt issued since 2009 will soon be coming due; and lenders may not be so accommodating this time around. Declining oil prices have already led to a number of bankruptcy filings among the more leveraged exploration and production, drillers and oilfield service companies. Brick and mortar retailers are struggling against the ever-growing popularity of online shopping. Detroit's high-profile bankruptcy might prompt other cash-strapped municipalities to follow suit, and we are already seeing fallout from the Affordable Care Act. Given all of these uncertainties, we can expect an eventual increase in business bankruptcy filings.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.