Covid Drove Corporate Bankruptcy Spike in 2020

The Covid-19 pandemic has resulted in a spike in bankruptcies among midsize to large U.S. businesses. In 2020, 244 U.S. companies with liabilities over $50 million filed for bankruptcy protection. That’s up nearly 70 percent from the 144 filings in 2019, and is the most since 2009, when 293 U.S. companies sought bankruptcy protection.

This news isn’t particularly surprising following a year in which corporate borrowing jumped dramatically. The Treasury & Risk “2020 Cash Management Survey” saw a significant shift in the proportion of readers whose companies are net borrowers. In 2019, close to two-thirds (62 percent) of survey respondents said their company was a net investor, while 38 percent reported being net borrowers. By the fall of 2020, only 52 percent of companies still had more funds than debt. Almost half (48 percent) said instead that their organization was a net borrower—an increase of more than 26 percent in just one year.

In fact, these numbers gibe with Treasury & Risk coverage all year, which reported corporate debt increasing to concerning levels, as well as alarming growth in the number of “zombie” companies—those whose revenues can’t cover interest expenses. As of late November, nearly 20 percent of the 3,000 largest publicly traded companies in the United States were zombies.

Meanwhile, trade credit insurer Atradius reported in July 2020 that its annual Payment Practices Barometer for the United States, Mexico, and Canada found “a dramatic rise” in the total value of overdue business-to-business invoices, “including a doubling of payments that are more than 90 days overdue.”

These numbers stand out in contrast to the recently released minutes from the December Federal Open Market Committee (FOMC) meeting, which struck a fairly optimistic tone. Last month, the Fed reported improving sentiment within the financial market, which it attributed to reduced uncertainty around the U.S. elections in November and the emergence of Covid-19 vaccines. While these developments are certainly benefiting some businesses, they came too late to save others.

Many of the companies that declared bankruptcy in 2020 hailed from industries that were hard-hit by the pandemic’s business restrictions and changes in consumer behavior. These include organizations in the travel and hospitality sectors, in addition to 47 energy companies, 27 retailers, and 22 healthcare businesses.

Of the 244 companies that fell victim to the pandemic, “most filed for bankruptcy since there was no clear direction on how long the crisis would last,” says an analysis by U.K. investor education firm BuyShares.co.uk. “Firms that filed for bankruptcy were already in debt, and lack of business in 2020 meant they could not operate smoothly.”

Bloomberg predicts that despite the emergence of Covid vaccines, which will hopefully start the economy down a path toward the return to normalcy, another wave of bankruptcies will crest later this year. “The junkiest companies are managing to dodge bankruptcy with bonds and covenant relief,” Bloomberg reported at the end of October. However, Bruce Mendelsohn, a partner at Perella Weinberg Partners, said at the time that he didn’t think that approach would work for much longer. “Companies that have historically been able to raise liquidity won’t be able to continue to withstand the operating and liquidity pressures of an extended pandemic.”