U.S. bankruptcy filings have slowed nearly to a halt, but they’re expected to pick up next year, led by companies that piled on debt to survive this year’s pandemic and election-related volatility.
“The march of the zombies will come to a head,” said Howard Steel, partner in the financial restructuring group at law firm Goodwin Procter LLP, who expects bankruptcy filings to accelerate in the second quarter of 2021. “Many of the companies that are surviving by issuing new debt to fund operating losses and interest payments will not be able to survive for the long run in a protracted pandemic.”
Almost 200 corporations have joined the ranks of so-called zombie firms since the onset of the pandemic, according to a Bloomberg analysis. Many of the country’s most iconic companies aren’t earning enough to cover interest expenses.
‘Stockings Are Tattered’
Every sector is at risk, Steel says, with borrowers in entertainment, food and beverage, hospitality and leisure services especially vulnerable to pressure from the Covid-19 pandemic, particularly if there’s a second round of prolonged lockdowns.
“The restructuring scene may be quieter as we hit the tail-end of the year,” Steel said. “After the holidays we will see the stockings are tattered and companies have a lot of holes in them that need repair.”
Some corporations that borrowed heavily early in the pandemic to cover interest and expenses are still afflicted by shrinking liquidity from operations, and the hardest-hit will probably need to restructure, he said.
Steel’s forecast for the timing of the next wave of Chapter 11s is in line with that of other bankruptcy experts. Malls and retailers are among sectors at risk for next year, according to Bruce Mendelsohn, Perella Weinberg Partners Group LP’s restructuring chief.
Slowest Since January
There was just one Chapter 11 filing by a company with more than $50 million in liabilities in the week ended Nov. 21 – Guitar Center Holdings Inc. That’s the least for any week since mid-January, data compiled by Bloomberg show.
There have been 227 bankruptcy filings year-to-date by companies with more than $50 million in liabilities, according to data compiled by Bloomberg. That’s the most since 2009, when there were 272 in the comparable period.
The total amount of distressed bonds and loans traded fell 2.3% to about $230 billion as of Nov. 20. That’s down from $935 billion in March, Bloomberg data show. Volume of distressed bonds rose 0.9% while troubled loans dropped 8.9%.
There were 470 distressed bonds from 228 issuers trading as of Monday – down slightly from the previous week – as liquidity flowed to the weakest borrowers, even as the Federal Reserve signaled a retreat. That’s significantly less than the 1,896 deals from 892 companies at the March 23 peak.
