Coming Soon: March of the Zombies
2020 bankruptcies were already at their highest level since 2009, and analysts think a bigger wave is on the horizon.
U.S. bankruptcy filings have slowed nearly to a halt, but they’re expected to pick up next year, led by companies that piled on debt to survive this year’s pandemic and election-related volatility.
“The march of the zombies will come to a head,” said Howard Steel, partner in the financial restructuring group at law firm Goodwin Procter LLP, who expects bankruptcy filings to accelerate in the second quarter of 2021. “Many of the companies that are surviving by issuing new debt to fund operating losses and interest payments will not be able to survive for the long run in a protracted pandemic.”
Almost 200 corporations have joined the ranks of so-called “zombie firms” since the onset of the pandemic, according to a Bloomberg analysis. Many of the country’s most iconic companies aren’t earning enough to cover interest expenses.
Every sector is at risk, Steel says, with borrowers in entertainment, food and beverage, hospitality, and leisure services especially vulnerable to pressure from the Covid-19 pandemic, particularly if there’s a second round of prolonged lockdowns.
“The restructuring scene may be quieter as we hit the tail-end of the year,” Steel said. “After the holidays, we will see the stockings are tattered and companies have a lot of holes in them that need repair.”
Some corporations that borrowed heavily early in the pandemic to cover interest and expenses are still afflicted by shrinking liquidity from operations, and the hardest-hit will probably need to restructure, he said.
Steel’s forecast for the timing of the next wave of Chapter 11 bankruptcies is in line with that of other bankruptcy experts. Malls and retailers are among sectors at risk for next year, according to Bruce Mendelsohn, Perella Weinberg Partners Group LP’s restructuring chief.
Last Week Saw Fewest Bankruptcies Since January
Still, there was just one Chapter 11 filing by a company with more than $50 million in liabilities in the week ended November 21—Guitar Center Holdings Inc. That’s the least for any week since mid-January, according to data compiled by Bloomberg.
There have been 227 bankruptcy filings year-to-date by companies with more than $50 million in liabilities, according to data compiled by Bloomberg. That’s the most since 2009, when there were 272 in the comparable period.
The total value of distressed bonds and loans traded fell 2.3 percent, to about $230 billion, as of November 20. That’s down from $935 billion in March, Bloomberg data show. Volume of distressed bonds rose 0.9 percent, while troubled loans dropped 8.9 percent.
There were 470 distressed bonds from 228 issuers trading as of Monday—down slightly from the previous week—as liquidity flowed to the weakest borrowers, even as the Federal Reserve signaled a retreat. That’s significantly less than the 1,896 deals from 892 companies at the March 23 peak.
Diamond Sports Group LLC had the most distressed debt of issuers that hadn’t filed for bankruptcy as of November 20, data compiled by Bloomberg show.
| Top 10 Distressed Issuers | Debt |
|---|---|
| Diamond Sports Group LLC | $8.1 billion |
| Envision Healthcare Corp. | $6.8 billion |
| American Airlines Inc. | $6.2 billion |
| Bombardier Inc. | $6.0 billion |
| Transocean Inc. | $5.5 billion |
| CHS/Community Health Systems Inc. | $4.8 billion |
| AMC Entertainment Holdings Inc. | $4.4 billion |
| Ligado Networks LLC | $4.1 billion |
| Crown Finance US Inc. | $3.3 billion |
| Nabors Industries Inc. | $2.5 billion |
Several distressed companies have significant dates approaching. Nabors has an extended early and final deadline for an exchange offer, and GTT will see the end of its lender forbearance.
See also:
- Corporate America’s Cash Burn Problem Is Getting Worse
- A Tsunami of Loan Modifications Is on the Horizon
- Strengthen Your Cash Position in the Covid-19 Crisis
—With assistance from Jenny Sanchez and Anik Chattopadhyay.
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