Big Firm Bankruptcies Reach Highest Rate Since 2009

Chris Gaetano
Published Date:
May 28, 2020

So far this year, 98 companies with more than $50 million in outstanding liabilities have sought bankruptcy protection from their creditors, already far surpassing the 17 we saw through all of 2019, according to Bloomberg. To find a time when the numbers were worse, we must go back to 2009: it saw 29 such bankruptcies in May that year, and 142 in the first four months.

Bloomberg said it is unlikely such bankruptcies will taper off⁠—indeed, they are actually expected to increase as the year goes on. This is despite the fact that companies have tapped an additional $1 trillion worth of debt since the crisis began, a record in terms of pace. However, the main beneficiaries of this borrowing binge have been stronger companies with better credit, leaving those in weaker positions to turn to bankruptcy courts instead.

recent report from Moody's, however, said that bankruptcy filings may be just the tip of the iceberg, as a larger number of companies are choosing to forgo the courts altogether and turn, instead, to distressed debt exchanges. This is when an issuer offers creditors new or restructured debt, or a new package of securities, cash or assets, that amounts to a diminished financial obligation relative to the original obligation. With such transactions having become an increasingly popular way to default since at least 2018, Moody's expects such transactions to increase due to their several advantages over bankruptcy filings–namely the significant private equity (PE) ownership of high-yield companies; cost-effectiveness compared to in-court restructurings; weak debt covenants; senior lenders' incentives; and better overall recovery prospects.

Despite this, however, the report also says that many of these firms might ultimately land in courts anyway, as Moody's believes that many of these distressed debt exchange deals will, themselves, default over time. It pointed to its own research saying that 30 years of default history suggests that, 41 percent of the time, distressed exchanges did not shore up the capital structures of struggling companies enough to stave off another default. This, though, may be strategic: it noted that in the 2015 many energy production companies underwent distressed debt exchanges, but then went bankrupt anyway; however they did so in 2016 when there was more liquidity available, which softened the blow. With this in mind, the large number of distressed debt exchanges could be a way for firms to buy time until they can file for bankruptcy in better conditions. 

This is consistent with predictions over the last few months that the sharp contraction in economic activity will lead to a wave of bankruptcies and corporate debt defaults. With these dire predictions now seemingly coming to pass, investors in distressed debt are gearing up for a buying spree of epic proportions as they anticipate more and more firms unable to meet their obligations.

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