TheEconomistMay 16th 2020 511“Y
ou will get business failures on a
grand scale.” So declared James Bul-
lard, president of the Federal Reserve Bank
of St Louis, on May 12th. Peter Orszag, a for-
mer official in Barack Obama’s White
House and now with Lazard, an investment
bank, warned that the American economy
could face “a significant risk of cascading
bankruptcies”. How bad will things really
get for America Inc?
The country has already seen a surge of
corporate bankruptcies among big firms
that puts 2020 on track to be the worst year
since 2009, at the height of the global fi-
nancial crisis. In recent weeks well-known
firms ranging from Neiman Marcus, a de-
partment-store chain, and J Crew, a cloth-
ing retailer, to Gold’s Gym, a glitzy workout
group, have gone bust. Hertz, a giant car-
hire firm, and Chesapeake Energy, a pio-
neer of America’s shale industry, are both
on the brink of bankruptcy.
As the American economy sinks further
in the coming months, many more firmsare sure to get into trouble. This raises
three questions. What early-warning signs
might reveal the scale of the coming wave
of bankruptcies? How does the looming di-
saster compare to the pain endured during
the financial crisis? And are there mean-
ingful alternatives to outright bankruptcy?
First, to harbingers of doom. One is the
upheaval in the market for “speculative
grade” (or junk) bonds. In America, two-
thirds of non-financial corporate bonds are
rated junk or bbb, the level just above junk.In April, Goldman Sachs, another invest-
ment bank, predicted that over $550bn of
investment-grade bonds will fall to junk
status by October (adding roughly 40% by
current value to the junk-bond market).
Edward Altman of nyu Stern Business
School reckons that about 8% of all firms
whose debt is rated speculative grade
(about 1,900 in all) will default in the next 12
months. This figure could reach 20% over
two years. He expects at least 165 large
firms, those with more than $100m in li-
abilities, to go bankrupt by the end of 2020.
A measure known as the “distress ratio”
also highlights the problem. Distressed
credits are junk bonds with spreads of
more than ten percentage points relative to
us Treasuries. s&pGlobal, a credit-rating
agency, reckons that distressed credits as a
share of total junk bonds in America had
grown to 30% by April 10th, up from 25% on
March 16th. Of the 32 worldwide junk-bond
defaults in April, a level not seen since the
financial crisis, 21 took place in America.
s&pGlobal estimates that the 12-month
trailing default rate for junk bonds in
America increased to 3.9% in April, from
3.5% in March. In Europe it rose to 2.7%
from 2.4%.
A wave of defaults might unfold with
varying severity across different indus-
tries. Thanks to the collapse of the oil price
as well as other troubles in the shale patch,
almost 70% of the speculative-grade debtBankruptciesChapter 11’s new chapter
NEW YORK
America Inc prepares for a wave of bankruptciesBusiness
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