United States: Two-speed business bankruptcies
The COVID-19 pandemic has hit the United States (U.S.) very hard, inflicting a heavy human and economic toll. The abrupt halt in activity to contain the spread of the coronavirus from March onwards has resulted in a 5% contraction in the first quarter of 2020 year-on-year (YoY), the sharpest drop recorded since 2008, as well as a surge in the unemployment rate. While the economy has already been declared in recession1, the decline in GDP is expected to be even more severe in the second quarter. The gradual reopening, which began across the U.S. in May, should allow the economy to gradually recover. In its baseline scenario, Coface forecasts GDP to contract by 5.6% in 2020, before rebounding by 3.3% in 2021. Nevertheless, the resurgence of outbreaks in several states - including Texas, Florida and California - in June, which will slow or even reverse the reopening process, exposes this forecast to significant downside risks.
The double economic shock of supply and demand has already resulted in a sharp drop in companies’ revenues, pressuring their cash flow. This situation should lead to an increase in the number of companies unable to meet their financial obligations, pushing them into bankruptcy. Nevertheless, similar to the European trend2, official data from the Administrative Office of the U.S. Courts for the first quarter, and the anticipated publications of the American Bankruptcy Institute (ABI) for April and May, suggest a decline in the total number of business bankruptcies since February. This trend is particularly due to Chapter 7 bankruptcy filings (see Box1).
Despite this trend, the increase in the number of companies seeking Chapter 11 bankruptcy protection is worth mentioning, probably heralding an overall rise in bankruptcies from the second half of 2020 onwards. Given the magnitude of the shock and as support measures gradually expire, Coface forecasts a 43% increase in business bankruptcies between end-2019 and end-2021 in the United States. The health of aggregate company balance sheets highlights that the aerospace, retail, automotive and energy sectors are the most vulnerable. Our estimate shows that the number of “zombie” companies, which continue to operate despite precarious solvency and profitability, has increased over the last decade and accounted for more than 6% of companies in 2019. These companies could also be pushed into bankruptcy in the coming months. More importantly, with more companies forced to leverage debt to cope with revenue losses, the threat of a multiplication of distressed companies is added to the risk of bankruptcy.
1 - In the United States, the National Bureau of Economic Research’s Business Cycle Dating Committee identifies a recession differently than the traditional method of two consecutive quarters of contraction. On 8 June 2020, the Committee identified a peak in activity in February 2020, marking the beginning of the first recession in the United States since June 2009. 2 - See « Corporate insolvencies in Europe: temporary framework amendments kick the can down the road», by Bruno de Moura Fernandes, Coface Focus (June 2020).