Tidal wave of bankruptcies coming

Flood of petitions will exceed 6,800 filed in 2019 and swamp system.

Mary Williams Walsh

Already, companies large and small are succumbing to the effects of the coronavirus. They include household names like Hertz and J. Crew and comparatively anonymous energy companies like Diamond Offshore Drilling and Whiting Petroleum.

And the wave of bankruptcies is going to get bigger.

Edward Altman, creator of the Z score, a widely used method of predicting business failures, estimated that this year will easily set a record for so-called megabankruptcies — filings by companies with $1 billion or more in debt. And he expects the number of large bankruptcies — at least $100 million — to challenge the record set the year after the 2008 economic crisis.

Even a meaningful rebound in economic activity over the coming months won’t stop it, said Altman, a finance professor, emeritus, at New York University. “The really hurting companies are too far gone to be saved,” he said.

Many are teetering on the edge. Chesapeake Energy, once the country’s second-largest natural gas company, is wrestling with about $9 billion in debt. Tailored Brands — the parent of Men’s Wearhouse, Jos. A. Bank and K&G — recently said that it, too, might have to file for bankruptcy protection.

More than 6,800 companies filed for Chapter 11 bankruptcy protection last year, and this year will almost certainly have more. The flood of petitions from the worst economic downturn since the Great Depression could swamp the system, making it harder to save the companies that can be rescued, bankruptcy experts said.

Most good-size companies that go into bankruptcy try to restructure themselves, working out payment agreements for their debts so they can stay open. But if a plan can’t be worked out, they can be liquidated instead. Equipment and property are sold off to pay debts, and the company disappears.

Without reform in the system, “we anticipate that a significant fraction of viable small businesses will be forced to liquidate, causing high and irreversible economic losses,” a group of academics said in a letter to Congress in May. “Workers will lose jobs even in otherwise viable businesses.”

Among their suggestions: increasing budgets to recall retired judges and hire more clerks and giving companies more time to come up with workable plans to prevent them from being sold off for parts.

The pandemic was enough on its own to put some businesses under. At the end of this year’s first quarter, U.S. companies had $10.5 trillion in debt — the most since the Federal Reserve began tracking the figure at the end of World War II.