Chap. 11 Bankruptcies Spike 63% From Year Ago
The chart below shows the year-over-year change in Chapter 11 filings. This eliminates the effects of seasonality. Red bars indicate that filings rose from a year ago. Blue bars indicate that filings fell from a year ago. Note the effects of the oil-and-gas bust in 2015 and 2016 and more recently the effects of the brick-and-mortar meltdown; but now it’s not just the brick-and-mortar meltdown anymore:
Monthly Chapter 11 filings are volatile. To smoothen out the volatility and eliminate the effects of seasonality we can look at the year-over-year changes as a three-month rolling average. For example, the three-month average year-over-year change for March is based on January, February, and March. And then the image becomes clear: There is a problem, and it’s not a blip:
The by now well-documented Brick-and-Mortar retail meltdown is responsible for part of it. Retailer bankruptcies of all sizes have been piling up in large numbers since 2016. They all started out as Chapter 11 filings, though many of them later turn into messy liquidations, like Toys ‘R’ Us.
Back on January 8, when I discussed the horrendous spike in Chapter 11 filings in December, I figured that there must have been another cause. The economy is doing OK. In Q4, it was stronger than it had been in prior years, when bankruptcies were much lower. And retailer bankruptcies alone wouldn’t cause that kind of spike. I speculated that that the advent of the new tax law had a lot to do with it.
Creditors and shareholders of failing companies knew that they could write off losses in 2017 under the old corporate tax rate of 35%, thus getting the government to pick up 35% of the tab of their losses via lower taxes. In 2018, the new tax law adds uncertainties, but shareholders and creditors knew that losses incurred in 2018 would face the new corporate tax rate of 21%, and so the government would only pick up 21% of the losses.
But in March, this logic no longer applies. So it looks like the December spike was a mix of tax consideration and a sharply deteriorating credit environment for companies.