Special Report

Shutdown: The Coronavirus

Corporate bankruptcy: ‘A story that’s not going away’

Car rentals have taken a big hit during the pandemic. Photo by @TonyTheTigersSon via Twenty20

Large companies have fallen, and the list is long. It ranges from 112-year old car rental company Hertz and retail brand J. Crew to oil giant Chesapeake and NPC International, the operator of 1,200 Pizza Hut restaurants.

A wave of corporate bankruptcies has  claimed 3,604 businesses  in the first half the year, up from 2,855 from the same period last year, according to Epiq Global, a firm that tracks data from US bankruptcy courts. With no vaccine for the virus yet, the coronavirus is still holding back the US economy, and bankruptcy filings are likely to accelerate, experts say.

“Companies in sectors like energy, retail and hospitality will continue to be under substantial pressure and see a lot of bankruptcy filings,” said Peter Friedman, a leading bankruptcy and restructuring litigator at law firm O’Melveny.

A pullback in consumer spending has hit retail stores hard, which were already facing tough competition from e-commerce giants like Amazon. Energy companies have also been hurt as the crisis sapped the demand for oil after travel and economic activity came to a screeching halt.

Under the Paycheck Protection Program, an aid program for small and mid-sized businesses, the government has issued 4.9 million loans totaling $521 billion as of June 30.  The program was set to expire on June 30, but Congress has extended it to Aug. 8.

Experts aid can help sustain businesses, but this model can’t be the panacea.

Despite receiving PPP loans, many companies are still going bust. Toojay’s, a popular Florida-based deli chain that had received $6.4 million in stimulus funds, is one of them. Almost one out of every 12 companies that have gone bankrupt since early April got PPP loans, according to a research firm bankruptcydata.com.

“PPP obviously can be helpful, but fundamentally if there is a loss in revenue or too much leverage on the business, it’s a different picture,” said Friedman.

Many debt-saddled firms could begin to file for bankruptcy under Chapter 11 if the economy doesn’t rebound.

Chapter 11 of the US bankruptcy code allows a troubled company to restructure its debt while continuing to operate. If the company fails to pay its creditors, its assets are liquidated under Chapter 7. June was a particularly bad month for companies this year. Commercial Chapter 11 filings were up 43% over June of last year, with 609 new filings, Epiq Global said. A total of 1,0121 companies were liquidated under Chapter 7 filings this year so far.

One of the biggest corporate casualties under Chapter 11 was Hertz, after stay-at-home orders   whacked its business. Already sitting on $17 billion in debt, the company gave in.

Household retailer J.C. Penney also filed for bankruptcy, after it struggled to service $4 billion in debt. The company has announced to close its 250 stores by the end of summer 2021.

“Going into recession with a heavy amount of debt is almost a recipe for bankruptcy,” Anthony Karydakis, Adjunct Professor at New York University’s Stern School of Business, said.

Karaydakis said companies that managed to survive the intense lockdown period, “are still not out of the woods yet.”

The piling up of debt and falling revenue has left companies teetering on the brink of bankruptcy.  Victoria’s Secret and Best Buy are among many that are on the edge.

US companies have piled on more than $11 trillion in debt over a decade, fueled in part by low interest rates from the Federal Reserve. For companies looking to raise funds, low interest rates make debt attractive because they lower borrowing cost. Cheap debt drives firms to take more debt at low interests from their creditors. But accumulating too much debt can be dangerous, especially when the economy slows.  Experts say many companies are likely to default on their debt payments now that the pandemic has hurt sales.

“Taking debt when the economy is doing ok is relatively manageable, but debt starts becoming a threat to the existence of certain companies when the economy slows down,” Karydakis said.

“Companies can’t hang around without making payments on their debt.”

Karydakis also says as more companies go bankrupt in the coming months there will be more job losses in the US. At 11.1%, unemployment still remains higher than at any point during the Great Recession. Karydakis noted it’s possible bankruptcies could keep unemployment elevated for months to come.

“Companies are going to lay off as more bankruptcies pile up. This will slow the pace of recovering the job market. This is a story that is not going away,” he added.


Tags


Other Stories in Special Report: Shutdown: The Coronavirus

A tribute to the mask pioneers

Bohao Liu July 11, 2020

Air pollution in China rebounds to pre-COVID level

Hannah Zhang July 11, 2020

ICE takes aim at international students

Maria Abreu July 10, 2020

Chinese students trapped by new ICE policy

Zishu Sherry Qin July 10, 2020

New ICE policy adds more turmoil to the lives of international students

Shiyu Xu July 10, 2020

Lawsuits follow ICE policy barring international students who are taking online classes

Joanna Lin Su July 10, 2020

Economists say the US needs a bold, generous fiscal response. Congress is likely to disappoint. 

Ahmed Mohamed July 9, 2020

Overseas Singaporeans have pandemic obstacles to voting

Yifan Yu July 9, 2020

Proximity sensors and hygiene stations are the “new normal”

Joanna Lin Su July 9, 2020

 Tour ticket vendors miss the hustle and bustle of Times Square

Narkwor Kwabla July 8, 2020

Dengue outbreak could be a greater threat than covid in Singapore

Yifan Yu July 8, 2020

Beijing reopens as the second wave of coronavirus dies down

Hannah Zhang July 6, 2020

Masks or no masks?

Bohao Liu July 5, 2020

Varsity Flu

Madeline Gunderson July 3, 2020

Rail travel in China is popular during the pandemic and filled with safety measures

Bohao Liu July 3, 2020

Brazilian international student caught in US travel ban.

Marina Guimaraes July 3, 2020

MTA faces crisis following COVID shutdown

Daniel Girma July 2, 2020

Easter Market goes back to its roots

Kyla Milberger July 2, 2020

China’s Airline Industry Aims to Lure Back Passengers with Unlimited Flight Pass

Zishu Sherry Qin July 1, 2020

US corporate debt soars during coronavirus outbreak

Gaurav Sharma June 30, 2020

In Singapore, gay pride goes online

Yifan Yu June 29, 2020

The Hair Room reopens

Shiyu Xu June 29, 2020

A second wave of the coronavirus creates travel woes in Beijing

Hannah Zhang June 29, 2020

Despite a few bumps, NYC is social distancing more than not

Joanna Lin Su June 29, 2020

Backyard music lessons

Madeline Gunderson June 28, 2020

Experts say ISIS exploits chaos of global pandemic to rebuild

Marina Guimaraes June 26, 2020

Cutting through COVID

Thomas Hengge June 26, 2020

Venezuelan government leaves residents stranded in U.S. during pandemic

Maria Abreu June 23, 2020

Vulnerable communities fear eviction as COVID-19 rent morotorium comes to an end

Jonathan Sarabia June 22, 2020

Beijing is China’s new epicenter for the coronavirus

Hannah Zhang June 22, 2020

Clock is ticking for NYC restaurants even as outdoor dining resumes  

Gaurav Sharma June 20, 2020

Michigan hair salons are back in business

Kyla Milberger June 17, 2020

Seafood markets in China lose business over new COVID-19 scare

Bohao Liu June 17, 2020

China resorts to street vending to revive its economy

Hannah Zhang June 16, 2020

The East Village is open! Well, sort of

Thomas Hengge June 15, 2020

My trip home during the pandemic

Zishu Sherry Qin June 15, 2020

Popular India Square “won’t be the same again” 

Gaurav Sharma June 13, 2020

Feds will not raise its key interest rate until 2022 and project slow recovery

Zishu Sherry Qin June 11, 2020

Despite pandemic, thousands of Syrians protest against government as economy collapses

Marina Guimaraes June 10, 2020

On the frontline of two deadly viruses

Narkwor Kwabla June 10, 2020

Bronx fish market struggles to stay afloat during pandemic

Daniel Girma June 9, 2020

Venezuelans leave behind a country in crisis only to encounter a new crisis in New York

Maria Abreu June 8, 2020

China promotes street vendors to reboot the economy

Bohao Liu June 8, 2020

For the developmentally disabled, COVID-19 brings new challenges

Kyla Milberger June 7, 2020

Giving food to Staten island vulnerable communities during the lockdown

Alpha Kamara June 6, 2020

Hong Kongers gather despite COVID-19 ban on Tiananmen vigil

Yifan Yu June 4, 2020

Army returns home after completing COVID-19 mission in New York 

Maria Abreu June 4, 2020

Ailana’s life in quarantine

Talgat Almanov June 3, 2020

Venezuela has another obstacle: the pandemic

Marina Guimaraes June 3, 2020

China’s two session political gathering sets priority for COVID-19 recovery

Zishu Sherry Qin June 1, 2020