Sunday, July 12, 2020

Brooks Brothers, Muji, and a steady drumbeat of sad bankruptcies

Here’s a sagacious Harvard Law professor named Elizabeth Warren writing about bankruptcy in 2009: “There is some evidence that Chapter 11 is used as both emergency room and morgue.”
A decade on, let the triage begin. 
COVID has put more than 100 U.S. companies on court-assisted life support and hundreds more are destined for a similar path. All told, Chapter 11 business filings increased 26% in the first half of the year and the pace does not seem to be slowing. In the past few days, Brooks Brothers, Muji, and Sur La Table joined the somber list, which already includes Chesapeake Energy, Cirque du Soleil, Hertz, and J.C. Penney. 
To Sen. Warren’s point, for a lot of these companies bankruptcy court will be a short stopping point before they dissolve into the ether. Only about one-third of Chapter 11 filings manage to have a restructuring plan confirmed. More than half of the companies Warren studied never even got around to proposing a restructuring plan; they were essentially dead on arrival. More recent research shows that about half of companies with a reorganization plan go bankrupt again within five years. 
The wave of filings is particularly troubling because Chapter 11 cases have slowed to a trickle in the past decade. A bullish economy accounts for much of the swoon, but so too does a burgeoning crowd of turnaround pros and M&A opportunists. Lately, any beast that lumbered into bankruptcy court tended to be a dinosaur on its last legs (see: Sears). 
Bankruptcies, like so much of the economic landscape, come with a big asterisk these days. Many of the companies seeking protection now would likely have been relatively fine if not for the pandemic. But therein lies the problem. Who knows when commerce will return to something resembling normal? 
Hertz can come up with the sharpest reorganization plan on record, but it won't be much good without business travelers at its counters and kiosks. The sickness is systemic. Same goes for a circus, an airline, or Bounce For Fun, a Texas outfit that rents those inflatable playgrounds for kids’ parties. 
Brooks Brothers, apparently, has some prospective buyers. And there's plenty of brand equity left in Muji, if social-media sadness is any indicator. Of course, that's never in short supply; if only it could pay the rent. 

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