The penultimate year in the first decade of the second millennium was one for the ages, or at least most people hope so. Almost nobody would choose to relive the tumultuous, teeth-grinding events of 2009 any time soon. 2009 saw what was (hopefully) the worst of the "Great Recession" that gripped most of the world beginning in the fall of 2008. In its waning months, 2009 also nurtured the green shoots of a recovery that, plagued by indicators (lagging or otherwise) such as enduring double-digit unemployment, high fuel costs, high mortgage foreclosure rates, tight credit markets, low interest rates, and low residential and commercial real estate values, is admittedly still fragile. As of the end of 2009, 7 million Americans had lost their jobs and 3.7 million homes had been foreclosed upon since the beginning of the recession. U.S. household net worth has contracted nearly 20 percent since the middle of 2008—an epic $12 trillion.
After all the "worst," "lowest," "least," "direst," and "biggest" designations awarded to the cataclysmic events of 2008, the catalog of original superlatives for the business and financial developments of 2009 is comparatively slim. Even so, 2009 was far from short on exceptional, notable, groundbreaking, and even historic events, particularly in the areas of commercial bankruptcy and restructuring.
2009 will be remembered as the year that terms such as "TARP," "TALF," "cash for clunkers," "Ponzi scheme," "too big to fail," and "stress tests" became ubiquitous (if not original) parts of the American financial lexicon. It will also enter the history books as the year that two of Detroit's Big 3 automakers motored through bankruptcy with the benefit of billions in taxpayer dollars, the year with the most unemployed Americans in over a quarter century, and the year that the U.S. deficit, as a percentage of U.S. economic output, surged to $1.42 trillion, the largest since World War II. 2009 will also enter the annals of U.S. history as the year that disgraced financier Bernard Madoff was sentenced to 150 years in prison for orchestrating the largest Ponzi scheme in history, a crime described by the sentencing judge as "extraordinarily evil" due to the billions bilked from thousands of investors. Standard & Poor's reported that global corporate bond defaults totaled 265 in 2009, with junk-rated companies comprising almost 90 percent of those that defaulted. The number of defaults was the highest annual total since S&P began tracking them in 1981, breaking the previous record of 229 in 2001. The U.S. led the world with 193 of those defaults, roughly twice the number recorded for 2008.
The nation's biggest banks began repaying their bailout money in 2009, although cynical observers have suggested that banks were motivated less by eagerness to repay American taxpayers than a desire to avoid restrictions on executive pay for TARP recipients. However, the largest players in the U.S. mortgage debt market remained on government life support throughout 2009 and are likely to stay there for some time. Fannie Mae and Freddie Mac, which buy and resell mortgages, used $112 billion in TARP money in 2009. Moreover, the Obama administration pledged on Christmas Eve to provide unlimited financial assistance to the mortgage giants, paving the way for the government to exceed the current $400 billion cap on emergency aid without seeking permission from a bailout-weary Congress. GMAC, which finances auto sales but also guarantees mortgage debt, has already drawn $13.4 billion in TARP money but needs at least $5.6 billion more, according to the government's "stress test" results. Insurance conglomerate AIG, which also guarantees billions in mortgage paper, is similarly in dire financial straits, having recently drawn $2 billion from a special $30 billion government facility created in the spring of 2009 after a $40 billion infusion of taxpayer money proved to be inadequate. The ongoing $180 billion AIG fiasco continued to figure prominently in headlines in 2010, after news outlets reported that the Federal Reserve Bank of New York advised the troubled insurer at the end of 2008 to withhold details of its bailout deal from the public.
All things considered, U.S. stock markets had a reasonably good year. After posting its worst January in percentage terms on record and plunging to 6,547.05 on March 9—less than half its peak only 17 months earlier—the Dow Jones Industrial Average regained some lost ground in 2009. The Dow closed above the 10,000 mark for the first time in more than a year on October 14, 2009, and closed out the year at 10,428 with an 18.8 percent gain for 2009, the biggest annual percentage gain in six years, although it was still down 26.4 percent from its all-time record set in October 2007.
210 public companies (i.e., companies with publicly traded stock or debt) filed for chapter 7 or chapter 11 bankruptcy protection in 2009, compared to 138 in 2008. This figure falls short of the record 263 filings in 2001 but nevertheless represents the most public-company bankruptcy filings since 2002, when there were 220. According to annual reports filed with the Securities and Exchange Commission, the aggregate prebankruptcy asset pool for the 210 public filings in 2009 was valued at nearly $600 billion, compared to the $1.2 trillion in assets placed under bankruptcy administration in the previous year (thanks, in large part, to Lehman Brothers, which tallied an eye-popping $691 billion in assets, the largest chapter 11 filing of all time). Year-end statistics released by Automated Access to Court Electronic Records, which is part of Jupiter eSources LLC, indicate that U.S. business bankruptcies rose 38 percent last year, with 89,402 chapter 7 and chapter 11 filings by businesses in 2009, compared to 64,584 in 2008. The volume of business filings set a new record in the bankruptcy era postdating enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA").
There were 55 names added to the "billion-dollar bankruptcy club" in 2009, more than double the number of initiates in 2008. Notable among them (including companies that are featured below in the Top 10 List for 2009) were Big 3
automakers GM and Chrysler; myriad bank-holding companies and mortgage lenders (continuing a trend established in 2008), including small to mid-sized business financier CIT Group; chemicals titan Lyondell Chemical; poultry products giant Pilgrim's Pride; gaming and entertainment company Station Casinos; hotelier Extended Stay; Reader's Digest, a fixture in U.S. households for more than three-quarters of a century; and door manufacturer Masonite, just to name a handful. Prominent names in the bankruptcy headlines of 2009 that did not crack the billion-dollar threshold included media conglomerate Sun-Times Media, which once owned the Chicago Cubs; newspaper and web-site publisher the Journal Register Company; clothing retailer Eddie Bauer; and elevator-music pioneer Muzak. Few industries were spared bankruptcy's trial by fire in 2009.
140 federally insured banks failed in 2009, straining to the breaking point the insurance fund administered by the besieged Federal Deposit Insurance Corporation, which projected in September 2009 that bank failures would cost the deposit insurance fund about $100 billion in the next four years. For the first time since it was formed in 1933, the FDIC was forced to demand prepayment of insurance premiums by banks. Although the number of bank failures quintupled the 25 failures of 2008, they were nowhere near the record volume experienced during the savings-and-loan crisis in 1989, when 534 banks closed their doors.
Private companies fared no better in 2009. For example, according to peHUB, an interactive forum for the private equity community, private equity-backed bankruptcies (excluding minority stake and hedge fund-backed bankruptcies) already numbered 46 only halfway through 2009, on a pace to double the 49 leveraged buyout-backed chapter 11 cases filed in all of 2008. The blistering pace abated, however, as seriously overleveraged companies found a way to stay out of the bankruptcy courts, chiefly by prevailing on lenders to extend debt maturities or face the prospect of a total meltdown and evaporation of asset and collateral values. peHUB placed the total number of private equity bankruptcies for all of 2009 at 74, while other watchdogs reported the total number to be above 100. The ranks of the fallen in 2009 included greeting-card company Recycled Paper Greetings, media companies Source Interlink and Bluewater Broadcasting, mattress maker Simmons Bedding, newspaper publisher the Star Tribune, jewelry retailer Fortunoff, and home ventilation products manufacturer Nortek.
More remarkable than the volume of business bankruptcy filings in 2009 was (renewed) evidence of the marked paradigm shift in chapter 11 cases, exemplified by the lightning-fast bankruptcy asset sales in the Chrysler and GM cases in 2009 and the Lehman chapter 11 case in 2008. The chapter 11 landscape is changing. Largely gone are the once typical chapter 11 cases of uncertain duration with a stable and reorganization-committed creditor base, an ample supply of inexpensive debtor-in-possession and/or exit financing, and an adequate "breathing spell" from creditors to devise a chapter 11 plan and to decide whether to assume or reject executory contracts and unexpired leases.
Those halcyon days have been supplanted by bankruptcy "quick fixes" involving prepackaged or prenegotiated chapter 11 plans and rapid-fire asset sales under section 363(b) of the Bankruptcy Code, a model that has been much criticized as antithetical to chapter 11's policies of adequate disclosure, absolute priority, and fundamental fairness. Overleveraged companies are burdened with multiple layers of senior, mezzanine, and second- (or even third-) tier debt. DIP and exit financing are hard to find, and loans, when available, are very expensive. Prebankruptcy creditors are more apt than ever before to cut their losses by selling their claims in the robust, multibillion market for distressed debt. The remaining creditor constituency is motivated more by the desire for profit than a commitment to develop an enduring and mutually beneficial relationship with a viable enterprise going forward. Among other things, this means that chapter 11 cases have become more contentious, and companies have fewer qualms about proposing chapter 11 plans that distribute little or no value to unsecured creditors.
Much abbreviated "drop dead" dates have constricted the time frames for a chapter 11 debtor to propose and confirm a chapter 11 plan and to determine which of its contracts and leases are worth retaining. New categories of administrative claims have made it more difficult for debtors to muster the financial means necessary to confirm a plan of reorganization. Likewise, enhanced protections for utilities and new ERISA "termination premiums" triggered by termination of a chapter 11 debtor's pension plans have made bankruptcy a more expensive proposition. Special protections in the Bankruptcy Code for financial contracts that were significantly augmented in 2005 mean that swap and repurchase agreements, forward contracts, and other types of financial contracts operate notwithstanding a bankruptcy filing. Because the automatic stay does not prevent these contracts from being liquidated or netted out, billions of dollars can be (and in many cases were) siphoned overnight from a contract party despite its filing for bankruptcy protection.
Bankruptcy professionals, commentators, and lawmakers have been taking a hard look at the current state of chapter 11, which has evolved considerably from its infancy in 1978. Some have expressed the view that chapter 11's "one size fits all" mentality is outdated or that the many changes made to the Bankruptcy Code by special interests have emasculated chapter 11 as a vehicle for reorganizing companies, saving jobs, and preserving value for creditors. For example, the Obama administration proposed legislation in December 2009 that would create a "resolution authority" and a "systemic resolution fund" to deal with bank-holding companies and other nonbank financial institutions that pose "systemic risk." A competing bill introduced in the U.S. House of Representatives in 2009—the Consumer Protection and Regulatory Enhancement Act of 2009, H.R. 3310—proposes to add a new chapter to the Bankruptcy Code (chapter 14) to deal with the adjustment of debts of nonbank financial institutions that are deemed "too big to fail." The legislation was proposed in response to a widespread perception that the U.S. government fumbled the ball in dealing (or not dealing) with the collapses of Lehman Brothers, Bear Stearns, and AIG, which fueled a nationwide financial panic. The debate concerning this controversial issue will doubtless endure for some time.
Where Do We Go From Here?
Prognostication is always an iffy proposition when it comes to developments in business bankruptcy and reorganization. Even so, given trends established or persisting in 2009, such as the continuing weakness in consumer demand, ballooning health-care and employee legacy costs, high fuel prices, double-digit unemployment, and dubious prospects for a "jobless recovery," it is not difficult to predict that the waves of commercial bankruptcies will continue well into 2010 and probably beyond. Industries especially susceptible to bankruptcy risk continue to be media, automotive (despite the sale of 700,000 (mostly Japanese) new vehicles as part of the "cash for clunkers" program), airline, home construction, retail, mortgage lending, entertainment and, due to chronic high vacancy and default rates, commercial real estate. Prepackaged chapter 11 cases, section 363 asset sales, and chapter 7 liquidations are likely to continue to predominate in 2010.
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