As pundits and politicians continue to speculate about economic recovery, hundreds of companies large and small are struggling under loads of debt, filing for bankruptcy and closing their doors.
In September, 54 more large companies filed for bankruptcy, according to S&P Global intelligence. A total of 509 companies have gone bankrupt this year as of Oct. 4, exceeding the number of filings during any comparable period since 2010. That was piled on top of the 54 companies that filed for bankruptcy protection in August.
S&P Global data includes public companies with a minimum of $2 million in either assets or liabilities or private companies with public debt and a minimum of $10 million in assets or liabilities.
Thirty-seven companies have gone bankrupt with more than $1 billion in liabilities this year.
Consumer discretionary has been the hardest hit sector with 103 bankruptcies, followed by industrials (70), energy (58), healthcare (47), and consumer staples (27).
As we reported last week, brick and mortar retail companies have been pummeled by bankruptcies and store closures. Through the first six months of 2020, 18 retailers filed for Chapter 11 bankruptcy, with an additional 11 filing in July through mid-August. The pace of bankruptcies rivals 2010 in the wake of the Great Recession. In addition to the bankruptcies, more than a dozen retailers including Macy’s, Bed Bath & Beyond and Gap have announced they will shutter 50 or more stores, totaling a combined 4,200-plus stores.
The Federal Reserve Bank of San Francisco recently issued an economic letter outlining worries about the risk of business insolvency during the coronavirus crisis. It points out that there were already significant problems with corporate indebtedness that the impacts of the pandemic have exacerbated.
While financial firms were generally well-capitalized and resilient before the onset of the health crisis, many other businesses entered the pandemic with very high levels of debt, or leverage. Against this backdrop, the pandemic has lowered corporate profits sharply. Credit availability turned scarce as lenders tightened underwriting standards. The ability of businesses to survive the crisis and the implications for financial stability has received heightened attention.”
Of course, it was artificially low interest rates courtesy of the Fed that made the extraordinary levels of corporate indebtedness prior to the pandemic possible in the first place. In the fall of 2019, the Fed issued a report warning about growing levels of corporate debt.
Borrowing by businesses is historically high relative to gross domestic product (GDP), with the most rapid increases in debt concentrated among the riskiest firms amid weak credit standards.”
It appears those chickens are coming home to roost. And the solution is more of what caused the problem to begin with – low interest rates, easy money and unprecedented stimulus.
Interestingly, consumer bankruptcy filings have dipped, falling 36% in September. According to WolfStreet, ” Consumers were still flush with government stimulus money and the extra unemployment benefits of $600 a week through July, and the $300 a week for at least four weeks afterward, much of which was processed late and arrived in lump-sum payments weeks or months late, therefore dragging into the fall.”
Meanwhile, small businesses are simply shutting down.
According to a study by Brookings released last month, more than 420,000 small businesses have closed their doors permanently since the beginning of the pandemic. That represents a staggaring 7.1% of all small businesses.
Many small businesses still in existence remain closed. The report says that as of August, more than 18% of all US. small businesses, and more than 27 percent of those in leisure and hospitality, had not reopened.
Brookings estimates that we have lost some 4 million jobs in the small business sector “that will only return with the creation of new businesses.”
Even with businesses slowly reopening and absent a new wave of shutdowns, we shouldn’t expect a quick bounceback.
Even if for the remainder of the year losses simply keep pace with those in previous years, we will see a doubling of the ordinary annual rate of small business losses to more than 700,000 (or 12 percent). That likely optimistic scenario would see around 50 percent more business losses than at the peak of the Great Recession, and the largest loss of small businesses since records began in 1977.
Damage from the government shutdowns continues to ripple through the economy even as pundits and politicians talk about a “V-shaped” recovery. It seems highly unlikely that scenario will materialize.
Governor Whitmer’s executive orders have become an exercise of tyranny.