Will U.S. Bankruptcy Rise Further Amid Coronavirus Concerns?

The coronavirus pandemic has hit companies from almost all sectors across the globe. Since the virus outbreak in mid-March, there has hardly been any business sector that has not had to bear the brunt of the crisis.

In fact, of all the sectors that have been adversely impacted, the retail industry (except those having strong online presence), restaurants, real estate industry, finance industry, gyms, cruise and airline industry are a few that are expected to face consequences in the next couple of quarters as well.

Apart from these, the oil and gas industry is amongst the many that have been hit hardest. In addition to the uncertainty resulting from the pandemic, a plunge in oil prices (due to oversupply and low prices) has become a major concern for energy companies.

In fact, the imposition of lockdown across the globe and the resulting halt in business activities in the first half of this year forced many companies in the United States to file for bankruptcy, despite the introduction of the Paycheck Protection Program (“PPP”) by the government. The PPP aims to keep small businesses up and running with loans that can be converted to grants if certain terms are met.

In the first half of this year, U.S. commercial chapter 11 bankruptcy filings increased 26% year over year, per the data published by Epiq. With more companies seeking protection from creditors during the pandemic, U.S. courts recorded 3,604 business filings under chapter 11 of the Bankruptcy code in the first six months of 2020. In fact, last month, commercial chapter 11 filings increased 43% from the year-ago period.

Of the many firms that have filed for bankruptcy in the United States, some of the notable ones are Hertz Global Holdings, Inc. HTZ, Whiting Petroleum Corporation WLL, Quorum Health Corporation, J.C. Penney and NPC International — the operator of various franchisees of The Wendy's Company WEN.

In addition to the coronavirus-led market turmoil, high debt level is another reason that has forced many companies to file for bankruptcy. Due to the extraordinarily low interest rates, majority of companies in the United States now have very high levels of debt. And, given the current crisis, the companies are not even being able to make timely interest payments and hence are having to file for reorganization under chapter 11.

However, to our respite, the current situation is not as bad as the 2008 financial crisis. This is because, companies now, especially finance sector firms, are comparatively sound with strong liquidity position than they were back then.

In fact, the Federal Reserve has been taking stimulus measures to inject liquidity into the economy and help companies remain operational. Also, with businesses opening up slowly, the situation is expected to improve in the latter half of this year.

However, until the invention of a vaccine, there cannot be any certainty regarding the virus and its outcome. Also, there might be a time when the government’s stimulus packages dry up or get exhausted. If till then the impact of the virus continues the way it is now, businesses will continue to be affected. That might result in an increase in bankruptcy filings, thus, disrupting the overall health of the economy.

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