A Growing Wave of Bankruptcies Threatens U.S. Recovery

The bankruptcy epidemic in the U.S. started last year, long before any COVID-19 pandemic had touched down. U.S. retailers ranked among the greatest casualties of 2019 with a total of 17 bankruptcies. Big names among the retail bankruptcies in 2019 included Gymboree on January 16; Charlotte Russe on February 3; Things Remembered on February 6; Payless ShoeSource on February 18; Charming Charlie on July 11; Barneys New York on August 6; and Forever 21 on September 29.

Now, the retail shutdowns resulting from COVID-19 have simply accelerated what was already a growing trend of companies seeking relief from debts they cannot pay back. Some of the major bankruptcies this year mean permanent, not temporary, job losses.

The 118-year old J.C. Penney Co. had 846 stores when it filed for bankruptcy on May 15 of this year. It said it plans to permanently close 242 of those stores. On May 19, Pier 1 Imports, which filed for bankruptcy in February, said it plans to liquidate all of its remaining 540 stores.

Hundreds of store closings in malls spell escalating job losses and more pain in the commercial real estate market. According to Moody’s, shopping mall vacancies had already reached an historic high of 9.7 percent at the end of March. Distressed mall owners will, in turn, put stress on big Wall Street banks which will have to take more loan loss reserves on their exposure to commercial real estate. That, in turn, will mean that the big banks, which have an outsized presence in consumer and business lending, will start trimming credit card lines to consumers and credit lines to businesses. In fact, that process has already begun. That, in turn, will stunt consumer spending, which, unfortunately, represents two-thirds of U.S. GDP.

Another major shopping mall retailer, J. Crew, filed bankruptcy on May 4. It has been slowly closing stores since 2018. It currently operates 182 J. Crew retail stores, as well as 140 Madewell stores. Due to its debt burden, analysts say it could be forced to close as many as half of its stores.

Neiman Marcus, which filed for bankruptcy protection on May 7, had announced  in March that it would close most of its off-price Last Call stores by early 2021. It has indicated it hopes to keep its 43 Neiman Marcus stores and two Bergdorf Goodman stores open.

Other big name retail bankruptcies this year include Modell’s Sporting Goods on March 11; True Religion on April 13; Roots USA April 29; Aldo May 7; Stage Stores (owner of Bealls, Palais Royal, Peebles, Stage and Goody’s) on May 11.

Just yesterday, discount retailer Tuesday Morning filed for bankruptcy protection with plans to permanently close about 230 of its 687 stores.

But retailers are not the only companies piled high with debt that are increasingly turning to bankruptcy protection. Telecommunications company, Frontier Communications Corp., filed for bankruptcy protection on April 15. It had $17.5 billion in debt.

With almost $19 billion of debt, the century-old Hertz rental car company filed for bankruptcy protection on Friday, May 22. In addition to Hertz, it operates Dollar and Thrifty car rentals. At the end of 2019, it had 38,000 workers. Earlier this year, it announced 10,000 layoffs. Hertz operates a fleet of 500,000 vehicles. It may begin selling off tens of thousands of those cars to raise cash, raising concerns that this could devastate prices in the used car market, potentially shuttering small used car businesses. A long-term problem for Hertz is that approximately two-thirds of its revenue stream comes from business at airports. The public is not expected to warm up to vacation airline travel anytime soon.

Bankruptcies this year in the energy sector are almost as severe as with retailers. One of the largest was Whiting Petroleum, which filed for bankruptcy protection on April 1. It has reported a net loss in four of the past five years. Diamond Offshore filed for bankruptcy on April 27, having also posted losses in four of the last five years, cumulatively totaling $1.2 billion in losses. At the end of last year, Diamond had almost $2 billion in long-term debt on its balance sheet with approximately $156 million in cash.

On April 15, shale driller Yuma Energy filed for bankruptcy protection, seeking court approval to auction off its assets.

Yesterday, S&P Global Market Intelligence reported that “the amount of defaulted U.S. leveraged loan debt over the past 12 months, at $37.4 billion, is 270% ahead of the figure one year ago, and is the highest since February 2010…” In February 2010, the U.S. was still in the midst of the overhang from the 2008 financial collapse on Wall Street, the worst crisis since the Great Depression.

S&P Global further reports that CLOs (Collateralized Loan Obligations) are “by far the biggest investor in the leveraged loan asset class” and that “CLOs have limits on the amount of lower-rated debt they want to hold.”

That would explain why the Federal Reserve has – after warning for months about the threat of leveraged loans – decided to accept CLOs as collateral for the loans it is making under its Primary Dealer Credit Facility (PDCF), just one of its alphabet soup list of Wall Street bailout programs. Stocks and other questionable collateral are also being accepted under this loan facility, which is currently making loans at ¼ of one percent interest to the trading houses on Wall Street.

According to the Fed’s latest report to Congress, as of May 14 it has $9.287 billion in outstanding loans under the PDCF facility against collateral of $10.37 billion. This means that we are now back to the days of the roaring twenties when margin loans against highly questionable collateral are being made on 90 percent margin.

The Vice Chair for Supervision of the Federal Reserve, Randal Quarles, has repeatedly stated that the Fed plans to make extra efforts at transparency and will reveal the names of borrowers and dollar amounts for its emergency loan programs. It has now filed three monthly reports to Congress and not one of the three reports contains any name of a Wall Street borrower or the individual amounts borrowed by a specific Wall Street firm.

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