United States: The Year In Bankruptcy: 2014

Compared to much of the rest of the world, the United States had the most positive economic, business, and financial news in 2014. Developments abroad were less hopeful, with Europe and Japan backsliding into recession, China's economic growth stagnating, Russia staggering under the weight of international sanctions for its meddling in Crimea and Ukraine, Argentina defaulting on its sovereign debt for the second time in 13 years, Venezuela brought to its knees by plummeting crude oil prices, regions of the Middle East ravaged by civil war and Islamic militants, and West Africa devastated (physically and economically) by the impact of Ebola.

Unlike in 2013, when the "fiscal cliff" loomed large and the U.S. government was shut down for 16 days in an all-out war over the implementation of the Affordable Care Act, lawmakers agreed not once, but twice, in 2014 to trillion-dollar-plus spending plans to finance the government. However, after the November mid-term elections gave Republicans control of both Houses of Congress for the first time in eight years, it remains to be seen whether any degree of bipartisanship will be possible during the final years of the Obama presidency. Among other things, executive orders implementing unilateral action on immigration reform and the normalization of relations with Cuba, as well as a fundamental disagreement on energy policy, make cooperation among lawmakers unlikely.

Janet Yellen was sworn in as the first female Chair of the U.S. Federal Reserve in February 2014, with the avowed intention of keeping interest rates low until the U.S. unemployment rate retreated further from the level of 6.7 percent achieved at the end of 2013. Mission nearly accomplished—the unemployment rate closed out 2014 at 5.6 percent (the lowest since 2008)—after the strongest year of job growth since 1999, and the Fed officially ended the final round of its quantitative easing ("QE3") bond-buying program, first implemented during the financial crisis at the end of October. Interest rates, however, are expected to remain at rock bottom at least during the first quarter of 2015.

Nearly every measure of U.S. economic growth was positive at the end of 2014. According to government data released on December 23, the U.S. economy grew at its fastest rate in more than a decade from July through September—the latest sign that the economic recovery is running full speed ahead. The U.S. Commerce Department reported in October that gross domestic product ("GDP") growth hit an annualized rate of 5 percent in the third quarter, a rate of expansion not seen since 2003.

The U.S. budget deficit dropped to $483 billion at the end of September (the fiscal year, or "FY") and stood at $488 billion at the end of the calendar year ("CY") 2014, the lowest level in six years. As a percentage of GDP, the deficit fell to 2.8 percent, the lowest level since 2007. The deficit reached a record $1.4 trillion in 2009.

An accelerating U.S. economy trumped problems overseas to lift the U.S. stock market to new highs in 2014. The Standard & Poor's ("S&P") 500 Index closed out 2014 with a gain of 11.39 percent. The Dow Jones Industrial Average (which surged above 18,000 for the first time on December 23) closed up 7.52 percent for 2014, while the NASDAQ Composite Index ended up 13.4 percent. According to S&P Ratings Services, the 70-month run-up in U.S. markets beginning in early 2009 is the fourth-longest bull market since World War II. U.S. stocks were bolstered in 2014 by accelerating economic recovery, strong earnings growth, and the Fed's decision to keep interest rates low even though it ended QE3. Low bond yields mean that companies can continue to borrow cheaply.

The year 2014 was one of the best for mergers and acquisitions since the financial crisis. Some 40,298 transactions—worth nearly $3.5 trillion—were announced worldwide in 2014, according to Thomson Reuters. It was the biggest year for such deals since 2007.

Bankruptcy Filings

Business bankruptcy filings continued a downward trend in 2014. The Administrative Office of the U.S. Courts reported that business bankruptcy filings in FY 2014 totaled 28,319, down 19 percent from the 34,892 business filings in FY 2013. Chapter 11 filings totaled 7,658 in FY 2014, down 20 percent from 9,564 in FY 2013.

The data for bankruptcy filings in CY 2014 paint a similar portrait. According to Epiq Systems, total commercial bankruptcy filings during CY 2014 were 34,455, a 22 percent drop from the 44,083 filings during CY 2013. Chapter 11 business filings were 5,172 for 2014, compared to 6,598 for 2013. There were 21,211 chapter 7 commercial filings in 2014, compared to 27,662 for 2013. Fifty-nine chapter 15 petitions were filed on behalf of foreign commercial debtors in CY 2014, compared to 82 in CY 2013 and 116 in CY 2012. Ten municipal debtors filed for chapter 9 protection in CY 2014, compared to nine in CY 2013 and 20 in CY 2012.

The number of bankruptcy filings by "public companies" (defined as companies with publicly traded stock or debt) in 2014 was 52, according to data provided by New Generation Research, Inc. ("NGR"). It was the smallest number of public bankruptcy filings since at least 1980 (and perhaps ever, according to NGR). There were 71 public-company filings in 2013, whereas 87 public companies filed for bankruptcy in 2012. At the height of the Great Recession, 138 public companies filed for bankruptcy in 2008 and 211 in 2009. The combined asset value of the 52 public companies that filed for bankruptcy in 2014 was $71.8 billion. For the third straight year, the health-care and medical sector claimed the largest number of bankruptcies, followed by oil and gas, retail, telecommunications, transportation, banking and finance, and electronics.

The year 2014 added 11 public-company names to the billion-dollar bankruptcy club, compared to 10 in 2013. Counting private-company and municipal filings, the billion-dollar club gained 13 members in 2014.

The largest bankruptcy filing of 2014—Energy Future Holdings Corp., with $41 billion in assets—was the eighth-largest public filing of all time, based upon asset value.

Twelve public and private companies with assets greater than $1 billion exited from bankruptcy in 2014—including six of the 13 billion-dollar public and private companies that filed in 2014. Continuing a trend begun in 2012, more of these companies reorganized than were liquidated or sold. Notable among them was chemical conglomerate W.R. Grace & Co., which emerged from chapter 11 on February 3, 2014, more than 12 years after filing for bankruptcy protection to deal with billions of dollars in asbestos liabilities.

The year 2014 saw the denouement of the largest bankruptcy filing by a U.S. city ever—Detroit—which obtained confirmation of a sweeping "grand bargain" chapter 9 plan of adjustment on November 7, 2014, that eliminates more than $7 billion in debt while rehabilitating crippled city services and leaving retiree pensions and health-care benefits largely intact.

Calls for U.S. bankruptcy reform figured prominently in 2014. On December 8, 2014, the American Bankruptcy Institute Commission to Study the Reform of Chapter 11 issued its long-awaited Final Report and Recommendations. The comprehensive overhaul proposals, which will be presented to Congress in 2015, include sweeping changes to the Bankruptcy Code that are deemed necessary as a consequence of, among other things, changes in the way businesses are financed and escalating administrative costs.

The Federal Deposit Insurance Corporation (the "FDIC") shuttered 18 banks in 2014, compared to 24 in 2013. This represents the lowest number of bank failures since 2007. There were 157 bank failures in 2010 and 140 in 2009, during the height and immediate aftermath of the Great Recession.

The long-running dispute over payment of Argentina's sovereign debt continued to play out in agonizing detail throughout 2014, with Argentina losing at all levels of the U.S. judicial system in its pitched battle with holdout bondholders from its 2005 and 2010 debt restructurings. After the U.S. Supreme Court refused to review lower court rulings prohibiting Argentina from making payments on restructured debt without also paying holdout bondholders, Argentina on July 30, 2014, defaulted on its sovereign debt for the second time in approximately 13 years. It did so again on October 30, 2014. The battle between Argentina and "vulture fund" holdouts prompted calls in the United Nations and elsewhere for international legislation to restrict "predatory lending practices" that make sovereign debt defaults more likely.

Top 10 Bankruptcies of 2014

The composition of the Top 10 List of public bankruptcy filings for 2014 indicates that the U.S. has largely left behind the fraud, excess, abuse, and improvidence that dominated the bankruptcy landscape during the 2007‒08 financial crisis and the ensuing Great Recession. Continuing a trend that began in 2012, only a single representative from the banking and financial services industry made the cut. The remainder reflect more recent market-driven developments, including a drop in cargo shipping rates worldwide (two companies) and plunging fossil fuel, electricity, and nuclear power prices (four companies). Other debtors on the Top 10 List for 2014 were undone by product/infrastructure obsolescence, slowing economic growth abroad, and faulty product design. Each company gracing the Top 10 List for 2014 entered bankruptcy with assets valued at more than $1 billion. Five of the 10 both filed for and emerged from bankruptcy in 2014—all but one as a reorganized entity (owned, with a single exception, by creditors). Half of the companies on the Top 10 List filed prenegotiated or prepackaged chapter 11 cases.

Dallas, Texas-based Energy Future Holdings Corp. ("Energy Future") surged into the No. 1 spot on the Top 10 List for 2014 when it filed for chapter 11 on April 29, 2014, in the District of Delaware with $41 billion in assets and $49 billion in debt. Following months of speculation over when it would file, the private equity-backed electricity provider filed for bankruptcy to implement a restructuring that would split the company between groups of creditors and eliminate more than $26 billion in debt. Formerly known as TXU Corp., Energy Future in 2007 was the subject of what was then the largest leveraged buyout ever. It was undone by a staggering debt load and plunging electricity rates caused by a free fall in natural gas prices, as hydraulic fracturing of shale rock unleashed a glut. Energy Future's chapter 11 case is the eighth-largest public chapter 11 case ever filed by asset value.

NII Holdings, Inc. ("NII"), a Reston, Virginia-based telecommunications company with 13,600 employees, grabbed spot No. 2 on the Top 10 List for 2014 when it filed for chapter 11 protection in the Southern District of New York on September 15, 2014, with $8.7 billion in assets and $3.5 billion in debt. Through its subsidiaries, NII provides wireless communication services under the Nextel name in Brazil, Mexico, Argentina, and Chile. Formerly known as Nextel International, Inc., NII changed its name in December 2001 and emerged from bankruptcy in November 2002 following an earlier chapter 11 filing. Jones Day is representing NII and its affiliates in connection with their chapter 11 cases.

Genco Shipping & Trading Limited ("Genco") steamed into the No. 3 berth on the Top 10 List for 2014 when it filed for chapter 11 protection on April 21, 2014, in the Southern District of New York with nearly $3 billion in assets and $1.5 billion in debt. A New York, New York-based company with 1,518 employees, Genco is engaged in the worldwide ocean transportation of dry-bulk cargoes, including iron ore, coal, grain, and steel products, with a fleet of 53 vessels. Weakness in charter rates made it difficult for the company to pay its creditors. The shipping industry has suffered from a glut of vessels after buying too many before the 2008 global recession, driving down rates and saddling companies like Genco with too much debt. Genco emerged from bankruptcy on July 9, 2014, after the court confirmed a prepackaged chapter 11 plan that slashed the dry-bulk shipper's debt load by $1.2 billion. Under the plan, lenders swapped $1.06 billion in debt for 81.1 percent of the equity in the reorganized company.

Waterford, New York-based producer of silicone, quartz, and specialty ceramic products Momentive Performance Materials Inc. ("Momentive") sealed up the No. 4 spot on the Top 10 List for 2014 when it filed for chapter 11 protection on April 13, 2014, in the Southern District of New York with $2.7 billion in assets and $4.2 billion in debt. Private equity-controlled Momentive sells its products in the Americas, Europe, and Asia. The overleveraged company blamed its financial condition on the continued slowdown of economic growth abroad and on overcapacity in the industry, which has negatively impacted both its silicone and quartz businesses. Momentive filed for bankruptcy with a prenegotiated plan to cut its debt by $3 billion. The court confirmed the plan on September 11, 2014, and Momentive emerged from bankruptcy on October 24, 2014.

Nuclear fuel provider USEC, Inc. ("USEC") powered into the No. 5 position on the Top 10 List for 2014 when it filed for chapter 11 protection on March 5, 2014, in the District of Delaware with $2.3 billion in assets and more than $1 billion in debt. Maryland-based USEC provides low-enrichment uranium to nuclear power plants. It has been working to implement a new enrichment method to replace the outdated and expensive process it used previously, but it has been stymied by debt and liquidity issues as well as a slump in prices. Apart from its looming debt, USEC had been hurt by falling prices and demand in the wake of the 2011 Japanese tsunami, which saw Japanese nuclear plants go offline, and Germany's pledge to phase out nuclear power by 2022. The bankruptcy court confirmed a prenegotiated chapter 11 plan for USEC on September 5, 2014. Under the plan, noteholders and preferred stockholders swapped their securities for new notes and 95 percent of the new common stock in the reorganized company.

New York, New York-based Eagle Bulk Shipping Inc. ("Eagle Bulk") slipped into the No. 6 berth on the Top 10 List for 2014 when it filed for chapter 11 protection on August 6, 2014, in the Southern District of New York with $1.7 billion in assets and $1.2 billion in debt. Eagle Bulk is engaged in the ocean transportation of various bulk cargoes worldwide, including iron ore, coal, grain, cement, and fertilizers, with a fleet of 45 oceangoing vessels. Like many other shipping companies, Eagle Bulk struggled due to an overleveraged balance sheet and a drop in shipping rates since the financial crisis of 2007‒08. The company emerged from bankruptcy on October 15, 2014, after obtaining confirmation of a prenegotiated chapter 11 plan that awarded 99.5 percent of the equity in the reorganized company to creditors.

Houston-based Endeavour International Corporation ("Endeavour") drilled its way into the No. 7 spot on the Top 10 List for 2014 when it filed for chapter 11 protection in the District of Delaware on October 10, 2014, with $1.5 billion in assets and $1.2 billion in debt. Endeavour is an independent oil and gas company that acquires, explores, and develops energy reserves and resources in the United Kingdom North Sea and onshore in the United States. The company suffered from overleveraging and "unfavorable changes" in the economic and political climate for the industry, as well as natural disasters, volatile commodity prices, and unexpected delays in new oil and gas production due to operating difficulties in the North Sea. It filed for bankruptcy with a prenegotiated chapter 11 plan that will slash approximately $568 million in debt as part of a restructuring that involves the issuance of new notes to bondholders and a debt-for-equity swap.

First Mariner Bancorp ("FMB"), the holding company for 1st Mariner Bank, Baltimore's largest independent bank, with $925 million in deposits and 16 branches, crashed into the No. 8 position on the Top 10 List for 2014 when it filed for chapter 11 protection on February 10, 2014, in the District of Maryland for the purpose of selling its bank subsidiary. FMB, which was undercapitalized and out of compliance with federal and state banking regulations, auctioned off 1st Mariner Bank in bankruptcy in June 2014 to an investor group that agreed to recapitalize the bank with approximately $100 million, thereby avoiding a takeover by the Federal Deposit Insurance Corporation. FMB had $1.4 billion in assets at the time of the chapter 11 filing. The bankruptcy court confirmed a liquidating chapter 11 plan for FMB on December 9, 2014.

The No. 9 spot on the Top 10 List for 2014 was excavated by James River Coal Company ("James River"), a Richmond, Virginia-based mine operator in the U.S. Midwest and Appalachia. James River filed for chapter 11 protection for the second time on April 7, 2014, in the Eastern District of Virginia, with $1.2 billion in assets and $819 million in debt. The company struggled with a steep drop in prices and demand for both thermal and steelmaking coal. U.S. power companies have switched to cheaper natural gas, and excess supplies of metallurgical coal, which is used in steelmaking, have created a global surplus and depressed prices. James River is one of two major coal producers—the other is Patriot Coal Corp.—to have been pushed into bankruptcy in recent years by weak market conditions both in the U.S. and abroad, and more may be heading that way.

The final spot on the Top 10 List for 2014 belongs to GT Advanced Technologies Inc. ("GT"), a Manchester, New Hampshire-based company that provides materials and equipment for the solar, light-emitting diode (LED), and electronics industries worldwide. Formerly known as GT Solar International, Inc., GT operated the world's largest artificial-sapphire factory, located in Mesa, Arizona, until shortly after the plant's investor—Apple Inc.—decided not to use synthetic sapphire in its newest iPhones because it proved to be too brittle and tended to crack on impact. After Apple withheld a final $139 million prepayment on its supply contract with GT, the company shut down the sapphire factory. GT filed for chapter 11 protection on October 6, 2014, in the District of New Hampshire, with $1.2 billion in assets. The bankruptcy court approved a modified $439 million settlement between GT and Apple on December 15, 2014.

Other notable debtors (public, private, and foreign) in 2014 included the following:

Revel AC, Inc., owner and operator of the Revel Casino Resort ("Revel"), a Las Vegas-style, beachfront entertainment resort and casino located on the boardwalk in the South Inlet of Atlantic City, New Jersey, with 1,399 rooms and 3,500 gaming positions. Listing assets of $1.15 billion, the resort filed for chapter 11 protection in the District of New Jersey on June 19, 2014, for the second time in just over two years, with the goal of selling its assets (yet again). After the proposed sale of Revel for $110 million to the highest bidder at a bankruptcy auction fell through in early December, the bankruptcy court awarded the company to back-up bidder and real estate developer Glenn Straub for $95.4 million on January 5, 2015.

Ontario, Canada-based Essar Steel Algoma Inc. ("Algoma"), Canada's second-largest integrated steel producer, with $1.7 billion in assets and $2.1 billion in debt. Algoma's foreign representative filed a petition on July 17, 2014, in the District of Delaware seeking recognition under chapter 15 of the company's Canadian restructuring proceeding. The bankruptcy court entered an order recognizing Algoma's Canadian restructuring case on August 20, 2014, to give the company an opportunity to implement a restructuring agreement that will include an equity infusion of as much as $300 million from Algoma's ultimate corporate parent, Mumbai, India-based Essar Global Fund Ltd.

Privately held ITR Concession Company ("ITR"), operator of the 157-mile Indiana Toll Road, with more than $1 billion in assets and $6 billion in debt. ITR filed for chapter 11 protection on September 22, 2014, in the Northern District of Illinois to implement a prepackaged chapter 11 plan. Under the plan, which was confirmed by the bankruptcy court on October 28, 2014, a 10-month sale process for the company's assets—primarily a lease agreement for the toll road through 2081—is being overseen by a special committee of independent directors. Should ITR fail to secure a buyer, the plan includes a back-up option whereby the company will restructure its balance sheet by means of a debt-for-equity swap and $2.75 billion in new loans.

Cayman Islands-based Suntech Power Holdings Co. ("Suntech"), the Chinese solar panel maker that was formerly the world's largest maker of photovoltaic cells for solar energy production. Suntech's provisional liquidators filed a chapter 15 petition on February 21, 2014, in the Southern District of New York, seeking recognition of Suntech's Cayman Islands provisional liquidation proceeding. The bankruptcy court entered an order recognizing Suntech's Cayman Islands liquidation on November 17, 2014, despite objections from rival solar panel manufacturer Solyndra LLC that Suntech had unlawfully migrated its center of main interests to the Cayman Islands. Suntech's chapter 15 petition listed total assets exceeding $1 billion.

Bumi Investment Pte Ltd and two affiliates ("Bumi"), entities formed under Singapore law to raise funds for, and act as guarantors for the debts of, their corporate parent, Jakarta, Indonesia-based PT Bumi Resources, one of the world's largest thermal coal exporters. Bumi's foreign representative filed a chapter 15 petition on December 1, 2014, in the Southern District of New York, seeking recognition of Bumi's Singapore restructuring proceedings. The financial condition of PT Bumi Resources has deteriorated in recent years due to the decrease in the global demand for coal. Bumi listed more than $1 billion in assets and liabilities in its chapter 15 petition.

U.K.-based Yellow Pages company Hibu PLC ("Hibu"), whose foreign representative filed a chapter 15 petition on January 28, 2014, in the Eastern District of New York, seeking recognition of Hibu's U.K. restructuring proceedings. Hibu and its affiliates print Yellowbook in the U.S., Yellow Pages in the U.K., and Paginas Amarillas in Spain, as well as White Pages directories in Argentina and Chile. The internet has been unkind to traditional Yellow Pages companies, sending many into bankruptcy in recent years as customers migrated to digital devices. Hibu received U.K. court and Pensions Regulator approval in March 2014 of a scheme of arrangement that transferred ownership of the company to creditors. Hibu listed more than $1 billion in assets and liabilities in its chapter 15 petition.

Privately held MACH Gen LLC ("MACH Gen"), which owns and manages three natural gas-fired power plants in Arizona, Massachusetts, and New York. MACH Gen filed a prepackaged chapter 11 case on March 3, 2014, in the District of Delaware that listed $750 million in assets and $1.6 billion in debt. On April 11, 2014, the bankruptcy court confirmed the plan, which features a debt-for-equity swap for second-lien lenders that slashed $1 billion in debt. When it filed for bankruptcy, the Athens, New York-based company blamed a decline in power demand stemming from the economic downturn, as well as lower gas prices and greater supply of renewable energy projects.

Novelty gadgets and consumer products retailer Brookstone, Inc. ("Brookstone"), which filed for chapter 11 protection on April 2, 2014, in the District of Delaware. Brookstone proposed to sell its operations for $146 million to New Jersey-based stalking-horse bidder Spencer Spirit Holdings, Inc. ("Spencer"), a distributor of gag gifts, entertainment products, and Halloween items. Spencer, however, was outbid at auction by a consortium of Chinese investors, which offered $174 million for Brookstone with a pledge to keep open most of the company's 240 stores and to expand the retailer's brand into the U.K. and China. Brookstone, which cited the recession for its financial woes, obtained confirmation of its chapter 11 plan on June 24, 2014, and emerged from bankruptcy on July 8, 2014.

Sandpoint, Idaho-based specialty women's apparel, jewelry, and accessories retailer Coldwater Creek Inc. ("Coldwater Creek"), which filed for chapter 11 protection in the District of Delaware on April 11, 2014, with $346 million in assets, seeking to liquidate its business. After a July 2014 auction of Coldwater Creek's remaining leases, the bankruptcy court confirmed a liquidating chapter 11 plan for the company on September 17, 2014.

Privately held 800-restaurant pizza chain Sbarro LLC ("Sbarro"), which filed for chapter 11 protection for the second time in less than three years on March 10, 2014, in the Southern District of New York, listing $100 million to $500 million in assets and debt. Melville, New York-based Sbarro has struggled in recent years as customer traffic slowed in the shopping-mall food courts where many of its stores do business. Sbarro emerged from bankruptcy on June 2, 2014, after obtaining confirmation of a chapter 11 plan under which lenders swapped $148 million in debt for control of the reorganized company.

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