COVID-19 expected to cause surge in bankruptcy applications
Experts predict an increase in the number of bankruptcies in all industries
The recession this summer led to the bankruptcy of dozens of large American companies. Experts assure that this is far from the limit.
Brooks brothers, Hertz, California pizza kitchen and Chuck E. Cheese are among the corporate victims of the pandemic.
Despite on unprecedented assistance from the Federal Reserve systems and Congress, bankruptcies of large companies rose 244% in July and August compared to the same period in 2019, according to research by investment bank Jefferies.
Some companies like JCPenney (founded 118 years ago) find buyers to save the business. But not everyone managed to avoid bankruptcy. Lord Department Stores & Taylor and Century 21 completely close.
The multitude of bankruptcy filings is yet another reminder that despite the revival of Wall Street and the real estate market, the pandemic has dealt a severe blow to thousands of companies, workers and shareholders..
«There are many businesses still suffering. We work 24/7», – said Joseph Acosta, Dorsey partner & Whitney specializing in bankruptcy.
A wide range of companies have filed for bankruptcy in recent months, including Chesapeake energy, Sur la table and Cirque du Soleil.
Unsurprisingly, some sectors hardest hit by the pandemic are seeing the biggest spike in bankruptcy filings. For example, bankruptcy filings in the aviation industry grew by 110% year on year, in the oil and gas segment – by 45%, in the entertainment sector – by 22%..
Experts believe this may only be the tip of the iceberg.
«This story is far from over. Once the government stops providing bailout packages, we will see the full picture of future bankruptcies.», – said Acosta.
According to Jefferies, as of the end of August, the number of bankruptcy filings for large companies with at least half a billion dollars in liabilities rose 120% year on year..
However, it is important to note that the number of bankruptcies among small and medium-sized enterprises practically did not increase.. At least for now.
Jefferies Banking Analyst Ken Usdin believes this is due to the fact that SMEs literally cannot afford to go bankrupt. Indeed, for this enterprise must pay a lawyer to go to court and draw up a reorganization plan..
«Reorganization costs money. Some small businesses feel that until someone starts to confiscate their property, they need to keep working. Companies cannot use the government’s Paycheck Protection Program (PPP) funds to file for bankruptcy», – said Acosta, partner at Dorsey & Whitney.
Other factors behind the shortage of small business bankruptcies include loyalty programs offered by major banks and government aid, such as a payroll protection program, that has stifled filings.. However, these aid programs will end sooner or later..
Jefferies Also Expects Bankruptcy Filing To Increase. Banks’ credit executives indicated in a July Federal Reserve survey that they will tighten lending standards. And this, as a rule, strongly correlates with credit losses..