Bracing for the next phase of the coronavirus recession: Bankruptcies
Art Van Furniture, Bar Louie and True Religion all sell different products, but they all have one thing in common: Each has gone bankrupt this year, as the coronavirus-induced recession that started in February flattens businesses large and small.
Recent data show 722 companies sought bankruptcy protection around the U.S. last month, a 48% increase from the year-ago period. Chapter 11 filings also jumped in April and March, as states started imposing business restrictions amid the coronavirus outbreak.
"This is a sign that already weak companies are succumbing to the lockdown recession," Chris Kuehl, an economist with the National Association of Credit Management, which tracks bankruptcies, said in a research note. Businesses that were struggling before the pandemic "are starting to get in some real trouble," he added
Among those long-distressed companies finally tipped into bankruptcy by the economic fallout from COVID-19: Gold's Gym, Hertz, J. Crew, J.C. Penney and Neiman Marcus.
Altough Congress has passed relief programs designed to help businesses survive shelter-in-place orders, including the Paycheck Protection Program and Economic Injury Disaster loans, the aid won't help floundering companies for long, one expert said.
"As this relief runs its course, however, mounting financial challenges may result in more households and companies seeking the shelter of bankruptcy," said Amy Quackenboss, executive director of the American Bankruptcy Institute.
Some analysts expect a wave of bankruptcy filings, particularly in hard-hit industries like retail and the energy sector, which has been slammed by falling oil prices and plunging demand during the virus. Boeing CEO Dave Calhoun also has predicted that a major U.S. airline will go bankrupt this year.
Of course, bankruptcy doesn't necessarily spell doom. Court supervision is designed to help companies shed or restructure their debt, restructure their business, and emerge from Chapter 11 as a streamlined, more competitive company. For other companies that have recently gone under, such as Pier 1 and Modell's Sporting Goods, bankruptcy is the end of the road.
Meanwhile, companies with healthy revenue streams, options for cutting costs and access to credit will rebound, predicted investment strategists Indranil Ghosh and Gina Sanchez. Although car sales have slumped, for instance, automakers are expected to bounce back as pent-up demand recovers and as many people shun public transportation due to virus concerns.
"Car manufacturers have been discounted in recent years due to falling ownership rates among the young, but they may regain lost ground due to COVID," Ghosh and Sanchez said. "Car traffic in China is back to 90% of normal levels whereas public transport is still only at 50% because consumers feel safer in their car."