(Bloomberg) -- Party City emerged from bankruptcy in October 2023, freed from $1 billion of debt and with “an excellent foundation in place to drive long-term growth,” as then-CEO Brad Weston put it. Just fourteen months later, it went broke again.
Joann Inc.’s round trip from bankruptcy and back could be even faster: It’s currently considering filing for protection from creditors again, according to people familiar with the matter, less than nine months after wrapping up a rapid-fire debt restructuring.
The two retailers are part of a small but growing segment of corporate America: the ranks of bankruptcy recidivists, those that are returning to US court to have their debts written down or sell off everything and close up for good.
Over the past two years, more than 60 companies have filed for bankruptcy for a second or even a third time, according to BankruptcyData. That’s the most over a comparable period since 2020, when pandemic lockdowns shut down vast swaths of the US economy.
The cohort is a sign of the stress that’s bubbling beneath an economy that’s otherwise consistently surprised forecasters with its strength. The sort of credit crunch that was once widely feared when the Federal Reserve was pushing up interest rates never materialized, and recently the risk of an overheating economy has been the dominant concern in financial markets.
Yet with interest rates elevated and some industries stung by shifts swept in by the pandemic, bankruptcies have continued to pile up for particularly hard-hit industries, including real estate companies, casual-dining chains and retailers like Party City. All told, US corporate bankruptcy filings hit a 14-year high in 2024, in the largest single-year tally since the aftermath of the Great Recession, according to data from S&P Global Ratings.
“For an industry like retail where there’s a secular challenge, it’s not surprising that even using all of the tools of bankruptcy, you could have an outcome where the turnaround doesn’t work out,” said Adam Shpeen, a partner in the restructuring practice at Davis Polk & Wardwell LLP, which advised Party City noteholders.
Chapter 11 is particularly useful to large retailers because it can give them the power to renegotiate leases. But even slashing their expenses hasn’t been a cure since inflation started squeezing consumers and business continued to migrate online.
Party City used its earlier bankruptcy to cut its debt, close 48 unprofitable stores and renegotiate roughly 450 leases, according to court documents. The business was also taken over by a group of bondholders that includes Silver Point Capital LP, Davidson Kempner Capital Management LP and Capital Research and Management Co.
Before the first bankruptcy ended, though, there was a sign that Party City would continue to face trouble when its financial projections forecast a greater-than-expected decline in same-store sales.
That was something bankruptcy couldn’t fix. The restructured company continued to see a drop in customer traffic. Late last year, a surprise write-down in the value of its inventories drove lenders to demand that the company set aside more cash. Just before Christmas, it announced it was going out-of-business, laying off its employees, and selling off its brand name and other assets in bankruptcy.
Party City didn’t return messages seeking comment.
Similar problems are pressuring other retail chains like mall-based teen apparel shop rue21 Inc., which filed bankruptcy a third time last year to close all its stores and sell its brand, and Eastern Mountain Sports, which also filed bankruptcy for a third time but kept some of its Northeast locations open.
Joann, the fabric and crafts retailer, is considering options to avoid that fate, including a sale or raising additional funds. A spokesperson for Joann didn’t return a request for comment.
Other companies have also been striking out-of-court agreements with lenders to slash debt without ceding control of the business, as happens in bankruptcy. But those don’t always prevent future distress: one analysis by Bank of America Corp. showed the companies still default again about 40% of the time.
“In some respects, that’s the functional equivalent of a repeat bankruptcy,” said Shpeen of Davis Polk.
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