Bankruptcy filings in the US are running at the fastest pace since 2013 as companies buckle under strain unleashed by the coronavirus pandemic.
A total of 3,427 companies have filed for Chapter 11 bankruptcy in the US this year — a common way for businesses in financial distress to reorganise themselves — according to data from legal services group Epiq.
That figure covers the start of the year to June 24 and is close to the 3,491 filings during the first half of 2008, just before the number of corporate collapses surged amid the fallout from the last financial crisis.
The rise in corporate distress, which has included bankruptcy filings by the likes of Canadian circus company Cirque du Soleil, car rental group Hertz and shale pioneer Chesapeake, comes after countries across the globe have been in lockdown for several months to halt the march of the coronavirus. This has laid bare weaknesses in global supply chains, forced factories to close and crimped consumer spending. The overall effect has been a dramatic decline in companies’ revenues.
“This is not like any other situation that the economy has experienced, certainly in my lifetime,” said Larry Young, a Houston-based managing director at consultant AlixPartners, which specialises in corporate turnrounds.
First the coronavirus hit companies that were already in trouble, he said, adding that the current wave of bankruptcies is likely to be just the first of many. During the last financial crisis there were 8,614 bankruptcies in 2008 and that rose to 12,644 in 2009, according to Epiq’s data.
Mr Young said: “The second wave I think is going to be a bit more of a challenge . . . those companies include airlines, hospitality companies, cruise lines, real estate companies.”
Elsewhere in the capital markets, there are other signs of financial distress. The number of companies that have defaulted on their debt so far this year has already surpassed the total for all of 2019, according to S&P Global Ratings. The tally of 119 defaults was led by the US, with 78 of them.
It puts the current total on course this year to be the highest since 2009. S&P also noted that the number of companies in the US and Canada on one of the lowest rungs of the ratings ladder — rated triple C plus — has almost doubled since the start of the year.
The data stand in contrast to an improving economic backdrop following hefty central bank support across the globe and economies starting to reopen. Even as equity markets and corporate bond prices have erased their losses for the year and Wall Street bankers have arranged record amounts of new debt to be sold to investors, the lists of bankruptcies and defaults have grown longer.
It indicates that even with a brightening outlook, the pain already inflicted by the global pandemic is too much for some companies to recover from.
“It is very difficult for these companies to operate in a near zero-revenue environment,” said Sudeep Kesh, head of credit market research at S&P. “They are facing a lot of pressure.”
However, Bruce Mendelsohn, who runs the restructuring advisory business at investment bank Perella Weinberg Partners, said the situation would be even worse if capital markets froze up.
“A robust capital markets environment helps many companies to raise liquidity to avoid a bankruptcy, while it also helps those companies that do need to file for bankruptcy raise the necessary liquidity to effect a quicker and more efficient bankruptcy process,” he said.