These companies ran out of options and entered bankruptcy.
Highly leveraged companies struggled even before the pandemic shut down businesses, but many ran out of options after restructuring attempts. When restructuring strategies such as layoffs, store closures, real estate sales and refinancing debt failed, filing for Chapter 11 bankruptcy protection was the only choice. Even some of America’s oldest companies such as Remington Arms and Brooks Brothers succumbed. Chapter 11 filings rose by 26% for the first half of 2020 compared with 2019, according to legal services company Epiq. Investors piled into the stock of these companies, and millions of shares have traded. But investing in bankrupt companies is a strategy for people who are experienced and is not for the novice investor, says Daren Blonski, managing principal of Sonoma Wealth Advisors in California. “While in recent weeks stock gamblers have made some returns buying bankrupt companies, many have found themselves owning companies and not being able to sell the stock,” he says. Here are seven companies that filed for bankruptcy in 2020.
Hertz Global Holdings (ticker: HTZ)
Auto rental company Hertz filed for bankruptcy in May with $24.35 billion in liabilities. The company’s attempts to move into the consumer travel market failed since its competitors Avis Budget Group (CAR) and Enterprise Holdings maintained market share. As business travel grounded to a halt, Hertz’s decisions to buy Dollar Thrifty and focus on providing cheaper sedans, instead of the SUVs that travelers sought, thrust them into Chapter 11 protection. Investors eagerly snapped up millions of shares even as the stock fell as low as 40 cents. While in some cases bankruptcy has been used as an investment tool, it is important to understand the capital structure of a company and how you will get your money back out of the investment, Blonski says. “As a general rule, don’t buy anything unless you have a clear exit,” he says.
Frontier Communications Corp. (FTRCQ)
Frontier Communications, the high-speed internet company, reported liabilities of $21.85 billion and assets of $17 billion. Shares of a company are often deemed worthless in a bankruptcy, and only the bondholders can claw back a percentage of their investments. The only sensible way to invest in a bankrupt company is via the bonds, says Charles Sizemore, chief investment officer of Sizemore Capital Management in Dallas. What often happens during bankruptcy organization is that the bondholders end up as the new owners of the company. “The stockholders get wiped out, and the bondholders become the new stockholders,” he says.
Intelsat SA (INTEQ)
Intelsat, the Luxembourg-based satellite provider, has $14 billion in debt. The company is waiting on the Federal Communications Commission to decide at its August meeting on whether its C-band satellite spectrum can be sold. The proceeds of a sale could help pay down its debt load. Before investors sink their money into a bankrupt company, they should be aware that equity holders typically have “zero chance of recouping anything,” says Patrick Morris, executive vice president and director of Unicorn REH, a Dallas-based exploration and production company. “In terms of trading strategies, I would lump it into the extremely risky, extremely speculative category,” he says. Bankrupt companies are at the mercy of the bankruptcy judge. “Unless you are watching the docket very closely, you could have a massive swing in value based on a ruling on a motion that you may not even be aware had been filed,” he says.
McDermott, the energy engineering and construction company, exited bankruptcy protection in June. The restructuring of the company eliminated most of its $4.6 billion of debt. McDermott now has a $2.4 billion credit capacity and $544 million of debt. The company sold Lummus Technology to a joint partnership between Haldia Petrochemicals, a flagship company of The Chatterjee Group, and Rhône Capital for $2.7 billion as part of its restructuring. The company’s stock was delisted by the New York Stock Exchange in February. McDermott faced challenges and rising debt after it acquired Chicago Bridge & Iron Co. in an all-stock deal valued at $6 billion that included nearly $4 billion in debt.
Ascena Retail Group (ASNAQ)
Ascena Retail Group owns retail stores geared for women such as Ann Taylor and Lane Bryant. The company said it will close 1,600 out of its 2,800 retail stores and also plans to eliminate $1 billion of its total $1.1 billion in debt. Brick-and-mortar retailers have faced lackluster consumer demand, decreasing footprints in shopping malls and centers and weak sales for the past few years. Stocks that have high trading volumes have become a concern with the U.S. Securities and Exchange Commission. Investors should examine the extreme volatility of these stocks before investing in them, Morris says. “At any time, the traders are at risk of a trading halt or suspension,” he says. “Frankly, it seems like an unwise and ill-advised idea. Common stock represents a share of future earnings. What are you buying in a bankruptcy?”
J.C. Penney Co. (JCPNQ)
J.C. Penney is part of a growing trend of retailers that filed for bankruptcy in 2020, including J. Crew, Ascena, GNC Lucky Brand, Neiman Marcus Group, Stage Stores, Sur La Table and Brooks Brothers. The company said in bankruptcy court it is looking for a buyer to avoid liquidation. A sale is expected to close by this fall. The storied department store was founded in 1902 but has been ailing for years as shoppers turned to its competitors and online sales dominated mall traffic. The company has $7.16 billion in liabilities and plans to emerge from bankruptcy with 600 stores, shuttering 246. Investors who are trading the stocks of bankrupt companies are taking a large risk. “At that point they are just gambling amongst each other, playing a game of musical chairs that can only be won if you stop playing the game entirely,” says Jason Spatafora, co-founder of marijuanastocks.com and head trader at truetradinggroup.com.
Chesapeake Energy Corp. (CHKAQ)
Oil and gas company Chesapeake Energy filed for bankruptcy protection with assets of $16.2 billion and liabilities of $11.8 billion. Negotiations with creditors failed with the shale drilling pioneer that was a top natural gas producer. Low crude oil prices in 2020 left the highly leveraged company with few options. The company said it plans to have $7 billion of debt eliminated after it emerges from bankruptcy. Restructuring a company’s debt will give some businesses an opportunity for a comeback while others are dependent on commodity prices rising and the economy to bounce back in 2021. Others are seeking suitors for an injection of capital or to be acquired outright.
Companies filing for bankruptcy:
— Hertz Global Holdings (HTZ)
— Frontier Communications Corp. (FTRCQ)
— Intelsat SA (INTEQ)
— McDermott International
— Ascena Retail Group (ASNAQ)
— J.C. Penney Co. (JCPNQ)
— Chesapeake Energy Corp. (CHKAQ)
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