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Over a month ago, in early May, zerohedge.com predicted what they termed a “‘biblical’ wave of bankruptcies” that was set to hit the already toppling US economy. When looking at the indicators–a wave of Chapter 11 filings, a massive spike in the unemployment rate, and an upward trend of loan delinquencies–it seems that we all should have seen this coming.
Now, that wave is here. According to Bloomberg, at least 13 US companies filed for bankruptcy protection last week, the highest figure recorded in a single week since May 2009 in the midst of the housing bubble. Leading the pack were the energy and consumer sectors, both of which have been hit particularly hard by the pandemic and a lack of demand.
It is to be expected that cyclical stocks, also called offensive stocks, fall when the economy is not performing well. After all, they are classified by their upward trend in response to increased spending by consumers and businesses, two things that have been wiped out by the health crisis.
Both the energy and consumer sectors are full of cyclical stocks. One classic example within the consumer sector is automobiles, which see their sales suffer at times of economic downturn because they are such big-ticket, expensive items. During the pandemic, households are obviously much more likely to prioritize groceries and mortgage payments than a new car.
However, last week also saw the filing of four consumer non-cyclical bankruptcies, bringing this year’s total to 28. Again, this is the highest statistic on record since 2009, and the sector is unlikely to hop on any sort of fast track to recovery as many states extend lockdown measures in the wake of shaky reopenings and surges of new cases. It demonstrates that consumers are not even buying the items and services they supposedly can’t do without (even in a crisis) at pre-pandemic levels.
Already, the energy sector has represented the vast majority of bankruptcies filed this year. Recall the crisis in the second quarter of the year, when oil prices experienced a tremendous slump. Excess supplies of crude oil pushed the value per barrel down from $18 to negative $38 in just a few hours, marking the first time US oil prices have slipped below zero.
Things are going to get much worse, and more bankruptcies are on the horizon. Chesapeake Energy Corporation, an Oklahoma City-based company with a specialization in hydrocarbon exploration, is just one of several companies in the sector that is teetering on the brink. Chesapeake’s market capitalization crashed from a peak of $23.42 billion to less than $100 million by May of this year. Their share price also dropped steeply from $7,122 back in February 2011 to a meager low of $8.71 on May 14. On June 8, the energy giant failed to pay its bondholders a $10 million sum, and is now reportedly preparing for the possibility that it will have to file for bankruptcy soon.
The other day, a welcome increase in the price of oil took Chesapeake’s stock back up 5 percent in a minor spot of good news for a devastated sector. Still, many economists are recommending that investors steer clear of the troubled stock.
California Resources Corporation, which is in the same line of business, also announced preparations for a potential Chapter 11 filing, but received an extension until June 30 to make interest payments that were originally due at the end of May.
In other news, Seadrill, a deepwater drilling contractor for the petroleum industry, is also considering bankruptcy.
Making the situation even more painful is the fact that borrowing bases are redetermined in the spring. These bases represent the total amount of collateral against which a lender will lend funds to a business, and are calculated by looking at the collateral value of oil and gas reserves. This year, they were cut back by an average of 23 percent across the board, leaving many energy companies with 25 percent less access to liquidity.
Among the biggest issuers who have not yet filed for bankruptcy are, of course, Chesapeake with $7 billion of debt, but also aviation giant American Airlines with $7.3 billion of debt.
American Airlines is considered the largest airline in the world by the number of aircrafts owned, the number of passengers carried, and revenue passenger mile. They managed to raise $2 billion in capital by selling off stock and securities, but shares were still down 6.8 percent yesterday, closing at $13.90. The airlines’ total debt is expected to hit a staggering $38.5 billion by the end of the second quarter as demand continues to suffer.”