The coronavirus-triggered downturn is pushing default rates higher and is also affecting the bankruptcy procedures used to address such credit defaults, according to Fitch Ratings. Several recent debtors have had their bankruptcy cases derailed as ability to access exit financing markets has been compromised. Similarly, decreased lender appetite for equitized debt as well as lack of third party interest in certain distressed assets has also disrupted the streamlined trend of pre-coronavirus Chapter 11s. Lender fears with respect to DIP facilities as well as an increased frequency of liquidation outcomes will likely further impede the goal of preserving value in U.S. bankruptcies during the crisis. Given that recoveries are tied to distributable value, a prolonged pandemic may contribute to lower creditor recoveries for debtors with disrupted processes.

The coronavirus bankruptcy disruptions are across industry sectors. Below are several recent examples of how the coronavirus has directly affected company restructuring strategies:

--EP Energy filed for bankruptcy protection in October of 2019. After months of contentious negotiations and several iterations of proposed plans, the debtors succeeded in achieving unanimous creditor-class support for a plan that would reduce debt by approximately $3.3 billion and transfer majority equity ownership to holders of certain 1.5 lien notes. The plan was confirmed by the bankruptcy judge in early March. However, days after confirmation, the plan parties were forced to abandon their proposals as market conditions, exacerbated by the coronavirus, proved impossible to support the capital transactions predicating the plan. The debtors and creditors supporting the plan mutually agreed to terminate their support agreements and backstop commitment agreements, and requested that the court vacate its order confirming the plan.

--In late March, Craftwork, the parent company of restaurant chain Logan's Roadhouse announced that the negative impact of the coronavirus outbreak led to a default under its $138 million post-petition DIP facility and a complete cessation of all its operations. The company had filed for Chapter 11 protection in early March, listing $235 million in debt and was pursuing a bankruptcy code "section 363 sale" of all its assets as a going concern. Although the company is still pursuing a sale, it has acknowledged that the shutdown of its restaurants may be permanent.

--VIP Cinema, manufacturer of movie theater seats, filed for bankruptcy in February with a consensual prepackaged plan and restructuring support agreement aimed to significantly reduce its debt load. However, with the mandated shutdown of movie theaters due to the coronavirus, the feasibility of the plan was called into question and creditors backing the plan decided to terminate their support. Once the RSA was terminated, VIP acknowledged that in the current social distancing environment, a going concern restructuring was unlikely to be achieved. The company is now pursuing a liquidation of its assets.

--Pier 1 Imports initially envisioned a sale process when it filed for bankruptcy protection in February. Those plans quickly fell through as the effects of the coronaviurs demonstrated that finding a willing purchaser would be unlikely. By the end of March, the debtors announced that they would be tabling the sale efforts in favor of an equitization restructuring with certain of its prepetition lenders. In the interim, Pier 1 has also received permission from the bankruptcy court to withhold rent payments as it tries to preserve any remaining going concern value.

An efficient and predictable bankruptcy process is key to preserving going concern value that underlies recoveries stemming from reorganized enterprise valuations. The disruptions imparted by the coronavirus, therefore, can affect ultimate recoveries in multiple ways. In the first instance, the operational impact the coronavirus may have on borrowers can impact recoveries as a result of lower going concern EBITDA forecasts and thus lower valuations. However, the procedural impact to an otherwise streamlined bankruptcy process can further impair creditors as borrowers struggle to maximize value through a short and efficient bankruptcy process.

Contact: Judah Gross

Director, Leveraged Finance
+1 212 908-0884
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004

Lyuba Petrova
Director, Leveraged Finance
+1 646 582-4885

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com

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