A tidal wave of bankruptcies is coming

By Mary Willimas Walsh

lready, companies large and small are succumbing to the effects of the coronavirus. They include household names like Hertz and J. Crew and comparatively anonymous energy compa- nies like Diamond Offshore Drilling and Whiting Petroleum.

And the wave of bankruptcies is going to get bigger.

Edward Altman, creator of the Z sco- re, a widely used method of predicting business failures, estimated that this year will easily set a record for so-called mega- bankruptcies — filings by companies with $1 billion or more in debt. And he expects the number of merely large bankruptcies — at least $100 million — to challenge the record set the year after the 2008 econo- mic crisis.

Even a meaningful rebound in econo- mic activity over the coming months won’t stop it, said Altman, the Max L. Heine pro- fessor of finance, emeritus, at New York University’s Stern School of Business. “The really hurting companies are too far gone to be saved,” he said.

Many are teetering on the edge. Che- sapeake Energy, once the second-largest natural gas company in the country, is wrestling with about $9 billion in debt. Tai- lored Brands — the parent of Men’s Wear- house, Jos. A. Bank and K&G — recently disclosed that it, too, might have to file for bankruptcy protection. So did Weatherford International, an oil field services company that emerged from bankruptcy only in De- cember.

More than 6,800 companies filed for Chapter 11 bankruptcy protection last year, and this year will almost certainly have more. The flood of petitions from the worst economic downturn since the Great De- pression could swamp the system, making it harder to save the companies that can be rescued, bankruptcy experts said.

Most good-size companies that go into bankruptcy try to restructure themsel- ves, working out payment agreements for their debts so they can stay open. But if a plan can’t be worked out — or isn’t suc- cessful — they can be liquidated instead. Equipment and property are sold off to paydebts, and the company disappears.

Without reform in the system, “we an- ticipate that a significant fraction of viable small businesses will be forced to liquidate, causing high and irreversible economic los- ses,” a group of academics said in a letter to Congress in May. “Workers will lose jobs even in otherwise viable businesses.”

Among their suggestions: increasing budgets to recall retired judges and hire more clerks and giving companies more time to come up with workable plans to prevent them from being sold off for parts. “Tight deadlines may lead to overly optimistic restructuring plans and subse- quent refilings that will congest courts and delay future recoveries,” they wrote.

The pandemic — with its lockdowns, which have just started to ease — was enough on its own to put some businesses under. The gym chain 24 Hour Fitness, for example, declared bankruptcy last week, saying it would close 100 locations becau- se of financial problems that its chief executive attributed entirely to the coronavirus.

But in many cases, the coronavirus crisis exposed deeper problems, like sta- ggering debts run up by companies whose business models were already struggling to deal with changes in consumer behavior.

Hertz has been weighed down by debt created in a leveraged buyout more than a decade ago and added to it with the acquisition of Dollar Thrifty in 2012. As it was battling direct competitors, the ascent of Uber and Lyft further upended the rental car industry.

J. Crew and Neiman Marcus were carrying heavy debt loads from leveraged buyouts by private equity firms while stru- ggling to deal with the changing preferen- ces of shoppers who increasingly buy on- line.

Oil and gas companies like Diamond and Whiting borrowed heavily to expand when commodities prices were much higher. Those prices started to fall as pro- duction increased and plunged further still when Russia and Saudi Arabia got into a price war shortly before the economic shutdowns began.

(And then there are cases that have nothing to do with the pandemic but no- netheless take up time and energy in the courts. Borden Dairy, a Dallas company with a history that goes back to 1857, de- clared bankruptcy in January, a victim of declining prices, rising costs and changing tastes.)

A run of defaults looks almost inevi- table. At the end of the first quarter of this year, U.S. companies had amassed nearly $10.5 trillion in debt — by far the most sin- ce the Federal Reserve Bank of St. Louis be- gan tracking the figure at the end of World War II.

“An explosion in corporate debt,” Al- tman said.

Having a lot more debt to deal with is likely to make the coming bankruptcies a bruising experience for unsecured credi- tors, who may include retirees with pen- sions or health benefits, vendors waiting to be paid, tort plaintiffs whose lawsuits are cut short and sometimes even current workers. If a company goes into bankrupt- cy with more secured debts than the value of its assets, the secured creditors — inclu- ding vulture investors who bought up the debt for a song — can walk away with vir- tually everything.

The sums at play in some of these cases will be enormous. Altman expects at least 66 cases with more than $1 billion in debt this year, eclipsing 2009’s mark of 49. He also predicted 192 bankruptcies invol- ving at least $100 million in debt, which would trail only 2009’s record of 242.

Robert Keach, a director of the Ame- rican College of Bankruptcy, said many companies had so far managed to put off bankruptcy by amassing cash and con- serving it as best they can: drawing down existing credit lines, furloughing workers, delaying projects and taking advantage of federal and state pandemic-relief programs. But when those programs expire, the companies will start burning through their cash. That’s when bankruptcy filings are likely to soar and stay elevated, Keach said. Expect “a COVID-19 cliff” in the next

30 to 60 days, he said.

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