US stock markets may be breaking records, but the state of distress for businesses in the country has never been worse.
big american company bankruptcy filings are now running at a record pace and are expected to exceed the levels reached during the 2009 financial crisis.
As of August 17, a record 45 companies each with assets of more than $1 billion had filed for Chapter 11 bankruptcy — a common way for financially troubled businesses to reorganize — according to BankruptcyData.com. New Generation Research analysis group.
This compares to 38 for the same period of 2009 at the height of the financial crisis and is more than double last year’s figure of 18 over the comparable period.
The figures only take into account primary case bankruptcy filings, which exclude filings from subsidiaries of large companies and may differ from bankruptcy statistics elsewhere.
A total of 157 companies with liabilities exceeding $50 million have filed for Chapter 11 bankruptcy this year and many believe many more will follow.
“We are in the early innings of this bankruptcy cycle. It will spill over into all sectors as we sink deeper into the crisis. It’s going to be a bumpy ride,” said Ben Schlafman, COO of New Generation Research.
The surge in bankruptcies comes despite trillions of dollars in government aid to mitigate the fallout from the coronavirus pandemic on businesses, underscoring the catastrophic and lasting impact of Covid-19 on the US economy.
“The end of federal unemployment benefits of $600 a week will push tens of millions of Americans into poverty or near poverty. They won’t have the money to buy billions of dollars worth of goods and services. As a result, the whole economy will suffer. Small businesses will continue to suffer the most because they are already insecure,” said Robert Reich, who served as US Secretary of Labor under Bill Clinton.
Multimillion-dollar defaults have been led by oil and gas companies this year as low crude prices have crippled many businesses. There have been 33 deposits to date, including Chesapeake, Whiting Petroleum and Diamond Offshore Drilling. There were only 14 last year.
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Retail businesses with assets over $50 million were also badly hit, with 24 filing for bankruptcy, a tripling of 2019 figures. They were among the hardest hit by government-mandated closures , which prevented stores from opening and drove consumers to online retailers such as Amazon. Burdened with debt, some of which has been accumulated under private equity ownership, several high-profile retailers have been forced to file for Chapter 11.
Neiman Marcus, the luxury department store chain that struggled for years with heavy debt following its 2005 leveraged buyout by TPG and Warburg Pincus, was forced to file for bankruptcy in May with liabilities of $6.7 billion. JCPenneyanother household name that was saddled with billions of dollars in debt, also filed for Chapter 11 bankruptcy in May. Brooks Brothersthe venerable costume retailer that once counted Abraham Lincoln and John F Kennedy among its customers, did the same in July.
“The Covid-19 pandemic is reshaping consumer buying habits. Therefore, we will continue to see major retail, energy and transportation companies take advantage of the tools provided by formal bankruptcy to restructure to be more profitable and competitive over the long term,” said Deirdre O’ Connor, general manager of corporate restructuring. within the Epiq legal services group.
The latest data on the rise in bankruptcies comes as the U.S. economy contracted at an annualized rate of 32.9% in the second quarter, the highest in post-war history, according to a preliminary estimate. from the Bureau of Economic Analysis.
Several businesses attempted to reopen in late May and June, but a recent spike in coronavirus cases and deaths in several US states has stifled the recovery, forcing many business owners to close again.
“It pains me to say this, but bankruptcy is a growing industry in America,” added Schlafman of New Generation Research.
Additional reporting by Chris Campbell