Coronavirus Economy: US Corporate Bankruptcies Surged 48% In May

An increasing number of U.S. companies have filed for bankruptcy amid the devastation brought on by the covid-19 pandemic and related lockdown.

Epiq Global, a legal services firm, reported that U.S. bankruptcy courts recorded 722 corporations across the country filing for chapter 11 protection in May, a 48% surge from May 2019, and a 28% jump from April 2020.

The number of corporate bankruptcies recorded in May was the highest since May 2011.

Some of the more prominent bankruptcies included retailers J.C. Penney, Neiman Marcus and J.Crew, as well as the U.S. unit of Le Pain Quotidien, Gold’s Gym and drug-maker Akorn.

Bloomberg reported that in May 27 companies with at least $50 million in liabilities sought court protection from creditors – the highest number since May 2009, when 29 such companies filed for bankruptcy.

"This is a sign that already weak companies are succumbing to the lockdown recession," said Chris Kuehl, an economist with the National Association of Credit Management, which tracks bankruptcies.

Companies that were struggling prior the pandemic "are starting to get in some real trouble," he added.

Retailers have been particularly savaged by the ongoing covid-19 calamity.

Retail landlords have been sending out thousands of default notices to tenants – particularly restaurants, department stores, apparel firms and specialty chains -- some of whom have not paid their rents in three months, due to business shutdowns and a collapse foot traffic and sales.

In some cases, landlords have locked up retail stores and cancelled leases.

"The default letters from landlords are flying out the door," said Andy Graiser, co-president of commercial real estate company, A&G Real Estate Partners. "It’s creating a real fear in the marketplace."

CoStar Group, a commercial property industry analytics firm, estimated that about $7.4 billion in rent for April -- about 45% of the amount owed by retail tenants – has not been paid.

Deborah Williamson, a bankruptcy lawyer with Dykema Gossett PLLC, said she expects more bankruptcies in the coming months.

"Hotels are not going to bounce back quickly. You’re going to see a long-term effect on office space," she said. "The consequence of the quarantine around the world -- it’s not going to magically go away as you reopen."

Another bankruptcy lawyer James Conlan of Faegre Drinker Biddle & Reath said his firm dealt with crippled companies in various sectors, including energy, airlines, aircraft leasing, real estate, automotive supply, hospitality and retail.

"I think we’re going to see an extraordinary number of large corporate bankruptcies, not just in the U.S. but across the globe," he said.

Eventually federal relief measures, which have kept thousands of businesses afloat, will expire.

“The Cares [The Coronavirus Aid, Relief, and Economic Security] Act and other swift government measures have been successful in keeping consumers afloat during the crisis,” said Amy Quackenboss, executive director of the American Bankruptcy Institute. "As this relief runs its course, however, mounting financial challenges may result in more households and companies seeking the shelter of bankruptcy."

Melanie Cyganowski, a former bankruptcy judge now with the Otterbourg law firm of New York, concurred: "I think we’re going to continue to see [bankruptcy] filings of at least the level we’re seeing for a while.”

The energy sector has also been hit with insolvencies as oil prices collapsed.

Law firm Haynes Boone said that in April and May, 14 oil and gas firms filed for bankruptcy — compared with five over the first three months of 2020.

Among the 14 companies that have filed include such names as Diamond Offshore, Yuma Energy, Victerra Energy, Freedom Oil and Gas and Gavilan Resources.

Haynes Boone noted that oil prices in the $30 range are "not a sufficient clearing price for many heavily leveraged shale producers." The firm added: “It is reasonable to expect that a substantial number of producers will continue to seek protection from creditors in bankruptcy even if oil prices recover over the next few months."

John Mitchell, partner with the law firm Akerman LLP in Dallas, forecasts more energy sector bankruptcies through this year.

“As you can imagine, we are seeing a lot of activity, but not as much as we expect in the future,” he said.

Mitchell explained companies seeking to stay in business first tap their credit lines, then spend cash reserves or seek out forbearance loans from creditors first.

“It takes time to dry up a credit line, spend cash or for creditors’ patience to run out,” he said. “A lot of clients have reached out to me. We’ve taken a holistic approach to looking at their customer list from A to Z and evaluated the credit risk of each one. That’s a smart move: Analyze what you can do to shore up credit assurance, look at credit assurance and ask what assurances you can ask for, whether it’s contractually, or if it’s not in the contract, ask anyway.”