Barron’s

Commentary, News

Wave Of COVID-19 Bankruptcies Poses Next Threat To US Economy

 

 
 

Larger companies have generally survived the initial blow from the coronavirus crisis, but still face existential challenges to get through what will probably be a long and grinding recovery.

Since COVID-19 shuttered much of the global economy, airlines, major retail chains, oil companies and other hard-hit businesses have been able to tap bank facilities and public debt markets for the funds they need to keep paying the bills and stay afloat.

That has raised worries about a much bigger wave of bankruptcies beyond the handful of retailers that have sought to restructure through the US process known as “Chapter 11.”

The US Congress moved with remarkable speed to approve rescue measures for small businesses, large industries and workers, amounting to nearly $3 trillion.

But that infusion simply “bought time… it postponed” bankruptcies, David Kotok, cofounder of Cumberland Advisors, said of the massive federal push to support the economy.

Kotok — who thinks it will take around five years for the US economy to fully recover — expects casualties in other sectors, including travel, leisure, real estate, energy and “more that haven’t surfaced yet,” he told AFP this week.

Federal Reserve Chief Jay Powell warned Wednesday of a potential “wave of bankruptcies” that could cause lasting harm to the world’s largest economy, and said more fiscal support may be needed to prevent the devastation, despite the massive cost.

Powell, who has launched a host of key programs to support credit markets and provide funds directly to companies, said there are limits to how far the Fed can go.

Retailers Neiman Marcus and J. Crew have filed for bankruptcy protection, and though other struggling companies have held on so far, there are plenty of signs of hardship.

US airlines already have already grounded thousands of planes and hinted at layoffs amid cost cuts, and Boeing Chief Executive David Calhoun said this week it was “most likely” that a major carrier would go under since the travel market is not expected to return to pre-coronavirus trends for five years.

Still, Credit Suisse said in an analysis that Nabors likely would need relief from its lending agreements by early 2021, which would require the firm to pay higher interest rates.

Royal Caribbean Cruises launched a $3.3 billion bond offering Wednesday, using its ships as collateral. Around 45 percent of guests from canceled cruises have requested cash refunds amid “significant uncertainty regarding worldwide port closures and availability,” the company said in a securities filing.

Higher borrowing costs are just one reason analysts say it will be difficult for companies in badly-hit industries to be profitable even once the strictest COVID-19 restrictions are lifted.

Until there is a vaccine, many businesses will need to respect social distancing protocols that will be demanded by consumers even if government restrictions ease.

On top of that, companies will need to adopt impeccable hygiene and provide employees with personal protective equipment, adding cost.

The Fed’s efforts to support the credit markets are a key reason there have not been more bankruptcies, and Powell acknowledged an “announcement effect” that already helped ease credit strains even before some programs are fully operational.

April and March were the two richest months ever for corporate debt issuance, and since March 23, investment-grade companies have raised nearly $530 billion in US credit markets, according to data from Refinitiv.

The speculative, or junk bond market also opened up compared with mid-March, albeit at higher interest rates and with shorter-duration issues, S&P said.

Kotok said the issue is the cost of the “gap-financing” needed to survive over two or three years.

 
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