Pandemic Triggers A Wave of Distress, Bankruptcy In Corporate America

What a time to be a restructuring specialist.

Practically overnight, bankers and lawyers who advise companies in distress have become some of the most in-demand workers on Wall Street, ending a long period in which rising markets and abundant capital consigned them to obscurity.

Stay-at-home orders and the shutdown of nonessential business have driven broad swaths of the economy into panic mode. In industries that were already in a precarious position before the crisis, including retail and energy, the coronavirus pandemic has tipped many companies over the edge. A host of oil companies have sought chapter 11 protection, while J.C. Penney Co. JCP 3.69% and Neiman Marcus Group Inc. are expected to file for bankruptcy soon.



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Companies in areas that were previously stable, such as the automotive, travel and leisure industries—and even health care—may soon face similar pressures.

U.S. corporate debt downgraded to selective default, meaning a borrower has failed to meet one or more of its obligations, totaled $64.1 billion for the 12 months ended April 17, according to S&P Global Ratings. That represents only a slight uptick over the pace at the end of January, but the numbers are about to get a lot more bleak.

In the coming months, that figure could top the roughly $340 billion reached at the height of the financial crisis, according to the worst-case scenario estimates from S&P. Even in a less grim scenario, the figure could approach levels reached after the dot-com bust in the early 2000s.

Companies of all stripes are scrambling to avoid a painful reorganization of their capital structures and operations, default or bankruptcy. Many have tapped lines of credit and slashed costs. Some, such as Carnival Corp., Expedia Group Inc. and Airbnb Inc., have issued new equity or debt to public investors or private-equity firms.

For some, those efforts could tide them over until conditions improve. But should the recession prove deeper than envisioned, there could be a second—potentially bigger—wave of corporate distress later this year as companies labor under the weight of additional debt taken on during the shutdown, advisers warn.

“We will definitely see an uptick in defaults and an uptick in restructurings,” said William “Tuck” Hardie of Houlihan Lokey Inc., one of the top banks in restructuring. “The question is: Is it a 2,000-foot mountain or is it Mt. Everest?”



U.S. companies drew down about $230 billion from revolving credit lines from the beginning of March through April 9, according to an analysis by Goldman Sachs Group Inc. The largest portion—around 17%—went to companies in the automotive industry, with about 15% going to retailers and 10% to travel and leisure purveyors.

Those figures don’t include new revolver borrowings by companies without publicly traded bonds or those financed by private lenders, many of which are private-equity-backed and were already highly indebted.

Hard-hit companies have taken on additional debt on top of using their credit lines—and some may have effectively boxed themselves in by doing so. Carnival earlier this month sold $4 billion worth of senior secured notes backed by assets like its cruise ships. Tying up those assets will make it difficult for the company to go back to the debt market if it needs to raise more cash, according to a person familiar with the company’s capital structure.

Another person close to Carnival said the cruise operator believes it still has a number of financing options available to it if cruising doesn’t return by early next year, and it expects to get access to government-backed loans in some of the markets where it operates.

For private-equity-backed companies, which are typically bought using a heavy helping of debt and a relatively small amount of equity, having little to no revenue can be even more painful. Loans to fund new buyouts had average debt of 5.93 times earnings before interest, taxes, depreciation and amortization in 2019—the highest since 2007, when the average was 6.23 times, according to S&P Global Market Intelligence’s LCD.

Working in their favor is the fact that 85% of so-called leveraged loans issued in 2019 were “covenant lite,” giving borrowers more breathing room. That figure has risen steadily over the past decade as investors clamored for yield. In 2010, only 10% of leveraged loans were covenant lite, according to data compiled by J.P. Morgan Asset Management.



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Also backstopping companies owned by buyout funds: Firms have around $2 trillion in unspent cash to invest in private markets, with most of that dedicated to private equity, according to alternative-investments manager Hamilton Lane Inc. Much of the dry powder is in the hands of the biggest firms, however, and companies’ fate will be determined by their owners’ willingness to inject more capital at a time when future prospects are highly precarious.



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And the universe of companies facing distress stretches well beyond the world of private equity, said Steve Zelin, head of restructuring at investment bank PJT Partners. “It doesn’t matter if you were five times levered or two times levered prior to the current crisis if you are now not generating any revenue.”

Investment firms that specialize in distressed investing have been gearing up for more action. Oaktree Capital Group LLC aims to raise $15 billion for what would be the biggest-ever distressed-debt fund, according to a person familiar with the matter.

Apollo Global Management Inc. has already invested more than $10 billion since the beginning of March in credit and private-equity.

James Zelter, the firm’s co-president who heads its $200 billion-plus credit business, says he sees three phases of distress playing out.

The first occurred during the early days of market turmoil in March, when even the debt of companies unaffected by the virus was trading at big discounts. The second is the industry-specific declines that led to the rescue financing companies like Expedia have been receiving.

“The third phase is just beginning,” Mr. Zelter said.




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