Even with trillions of dollars in loans, grants, and government support – with markets absorbing a record $ 1.22 trillion in corporate debt in just five months – a large number of businesses are defaulting on their loans and file for bankruptcy in what is expected to be a wave record of insolvencies and defaults.
Why is this important: As the equity and debt markets have recovered thanks to massive interventions by the Federal Reserve and Congress and the enthusiasm for the removal of foreclosure orders, the real economy is quietly collapsing, many companies being threatened by issues that predated the coronavirus pandemic.
What is happening: So far this month, 27 companies that report at least $ 50 million in liabilities have filed for bankruptcy protection, Bloomberg reports.
- This is the highest monthly total since May 2009.
Stay awake: “As we have seen in previous periods of economic stress, companies facing unforeseen financial burdens do not immediately resort to bankruptcy,” said Sudeep Kesh, head of credit market research at S&P Global, in a new report.
- “The majority of bankruptcies we’ve seen so far in Q2 2020 have been in companies facing idiosyncratic challenges ahead of COVID-19 and the oil price shock.”
What to watch: Already this year, 88 companies around the world have defaulted on their debt, according to S&P Global. This is almost double the number of business failures at this stage in 2019 (49) and more than double the 2018 total (43).
- Of the 88 defaults, 59 are due to missed interest and principal payments or bankruptcy.
And after: Distressed debt investors and law firms are bracing for the onslaught of bankruptcies, insolvencies and liquidations expected this year, lawyers warning congressional leaders in a recent letter that federal bankruptcy courts are likely to ‘be “overwhelmed by this flood of cases”.
- Centerbridge Partners recently activated an approximately $ 3 billion capital pool that had been on hold for four years to lead struggling assets, Jeffrey Aronson, a co-partner at the company, told the Wall Street Journal.
The last word: “You have to recognize that this recession, as difficult as it is, is just beginning,” Aronson said.