Earlier this year, Philadelphia-based radio and podcasting giant Audacy Inc. filed for Chapter 11 bankruptcy protection in which its CEO claimed a “perfect storm of macroeconomic challenges” was to blame. Lots of tech companies over the past few years have gone under, some more high profile than others. While most of these companies are in Silicon Valley, Philadelphia has its own tech industry that has also struggled as the tech boom fizzles a bit. When these companies fail, they go through bankruptcy, a super unfun process where a company liquidizes or reorganizes their structure in order to address their financial distress. Sometimes the company can recover, but usually they dissolve and cease to be. When companies have to go through this process, they should understand exactly what to expect.
Understanding the Types of Bankruptcy
Businesses usually file for bankruptcy under one of three chapters of the U.S. Bankruptcy Code: Chapter 7, Chapter 11, or Chapter 13. Each of these chapters serves a different, specific purpose in order to align with the company’s financial distress.
Chapter 7 (Liquidation Bankruptcy): Under this chapter, the company ceases all operations and a trustee is appointed to liquidate its assets. The sale of these assets are used to pay off creditors. If a company has failed beyond repair, Chapter 7 is their path.
Chapter 11 (Reorganization Bankruptcy): After approval from creditors and the bankruptcy court, this chapter allows a company to continue operating while reorganizing its structure. This is most common for tech companies and works as a kind of compromise between debtor and creditor. The company proposes a reorganization plan, an intention on how to return to profitability, that requires approval from creditors and the court. This is what Audacy filed for as they restructure their massive debt of $1.9 billion in debt.
Chapter 13 (Adjustment of Debts): This chapter is usually for individuals, though sometimes small business owners, particularly those operating as sole proprietors, can file for Chapter 13. This is largely, if not entirely, irrelevant to tech companies.
The Decision to File for Bankruptcy
Once other methods for saving a company from financial ruin, like cost-cutting, layoffs, restructuring, etc., the last remaining option is to file for bankruptcy. Audacy had already had a substantial debt when they bought CBS Radio in 2017 for $1.5 billion as a means to pay off the debt as the radio market grew. The idea was that people stuck in traffic on their commute would tune in. Then COVID hit. The market didn’t grow as expected and Audacy’s debt only grew. Through Chapter 11 restructuring, the company hopes to reduce its debt to $350 million. Had they not decided to file for bankruptcy, the debt would have grown.
The decision to file for bankruptcy is never one made lightly and always a last resort. In Audacy’s case, a poor prediction of where the market would go, radio vs. digital, is what led directly to their financial distress. While it’s a sad, even embarrassing day for Audacy, it’s moments like these that make bankruptcy attorneys in Philadelphia very happy. It may not be happy work, but hey, it pays the bills.
Filing the Bankruptcy Petition
In Philadelphia, the bankruptcy process formally begins when the spiraling company files a bankruptcy petition with the U.S. Bankruptcy Court for the Eastern District of Pennsylvania, the court with jurisdiction over all bankruptcy in Philadelphia. This petition includes all necessary information about the company’s unfortunate financial situation, such as assets, liabilities, income, expenses, etc.
Once filing, all collection activity by creditors, including lawsuits, repossessions, and foreclosures, are halted due to an automatic stay triggered by the filing itself. This acts as a protection, a pause of sorts, so the company may “catch its breath” as it moves through the bankruptcy process.
Chapter 7: The Liquidation Process
“Liquidating assets” sounds way cooler than it actually is. It’s basically a garage sale of failure, to put it bluntly. A trustee is appointed and they take control of the company’s finances, assesses its assets and their value, and sells them. Those proceeds go to paying off creditors. In a tech company’s case, those assets would include physical property such as office equipment and inventory (so many staples) and intellectual property. That’s where the real money lies. Intellectual property includes patents, software, and proprietary technology. The sale of these assets can be very attractive to competing tech companies.
Once the assets are sold, the proceeds are distributed to creditors in a specific order:
- Secured creditors (those with collateral) are paid first.
- Unsecured creditors (those without collateral) are next.
- Shareholders usually receive anything left over, although in most cases, there’s little to nothing remaining after creditor claims are satisfied.
- After the liquidation and distribution process, the company’s remaining debts are discharged, and the business is dissolved.
Chapter 11: The Reorganization Process
Audacy chose Chapter 11, a far more common bankruptcy choice for tech companies as they prefer to keep operating and generally feel they are tactful enough to survive with a restructuring. Often this means that the business model is still viable but is struggling financially. They have to propose a reorganization plan and await its approval or denial before moving forward. How that is negotiated varies based on what the creditors will accept and what the court deems appropriate.
A restructuring plan could mean renegotiating contracts, downsizing operations, layoffs, and/or selling off non-core assets to focus on the core business. Basically anything allows the company to alter its operations in a way that frees up funds owed to creditors is what flies under Chapter 11. The plan is there to offer an opportunity for the struggling company to “reset” and find a new way to pay their creditors and grow in their market successfully. If, however, the restructuring fails, then to Chapter 7 it goes.
Impact on Stakeholders
How bankruptcy affects people invested in a struggling or failing company changes depending on who they are. A creditor is going to have a way easier go of it than employees. And investors are, more or less, screwed.
Creditors: Depending on the chapter filed, creditors may receive partial payment, full payment, or in some cases, nothing at all. Secured creditors are usually in a better position to recover their investments compared to unsecured creditors.
Employees: In Chapter 7, employees often lose their jobs as the company shuts down. In Chapter 11, jobs may be preserved, but the company may renegotiate employment contracts, potentially leading to changes in salaries, benefits, or job roles.
Investors: Equity holders are typically at the bottom of the repayment hierarchy. In Chapter 7, they often lose their entire investment. In Chapter 11, there’s a chance of recovery, but it depends on the success of the reorganization.
Post-Bankruptcy
If a company successfully makes it through Chapter 7, they are no longer a company. If that company successfully makes it through Chapter 11, it can emerge with a “clean” sheet and a fresh restart. However, the stigma that comes with a bankruptcy can have an adverse effect on a company’s reputation and add to already existing challenges. It takes dedicated work to rebuild reputation and demonstrate renewed financial health. Unless, of course, you’re Donald Trump and then constant bankruptcies translate to being a “business genius.”
Audacy has its reorganization plan approved by the courts and is expected to emerge from Chapter 11 intact. Though there will be a new board of directors and almost certainly the removal of its current CEO, David Field. When you invest in radio broadcasting in 2017, well into the digital age, you’re not showing a whole lot of market savvy. Bankruptcy is a sign of downfall, but it’s not necessarily the end. If a company like Audacy can make a whoopsie daisy in focus and still emerge ready to do business, bankruptcy surely doesn’t mean it’s over.
