“Come down to Houston,” William Snyder, leader of the Deloitte Corporate Restructuring Group, told Reuters. “You’ll see there is just a stream of consultants and bankruptcy attorneys running around this town.”
But it’s not just in Houston or in the oil patch. It’s in retail, healthcare, mining, finance…. Bankruptcies are suddenly booming, after years of drought.
In the first quarter, 26 publicly traded corporations filed for bankruptcy, up from 11 at the same time last year, Reuters reported. Six of these companies listed assets of over $1 billion, the most since Financial-Crisis year 2009. In total, they listed $34 billion in assets, the second highest for a first quarter since before the financial crisis, behind only the record $102 billion in 2009.
The largest bankruptcy was the casino operating company of Caesars Entertainment that has been unprofitable for five years. It’s among the zombies of Corporate America, kept moving with new money from investors that had been driven to near insanity by the Fed’s six-plus years of interest rate repression.
Next in line were Doral Financial, security services outfit Altegrity, RadioShack, and Allied Nevada Gold. The first oil-and-gas company showed up in sixth place, Quicksilver Resources [Investors Crushed as US Natural Gas Drillers Blow Up].
Among the largest 15 sinners on the list, based on Bankruptcydata.com, are six oil-and-gas related companies. But mostly in the lower half. So far, larger energy companies are still hanging on by their teeth.
This isn’t the list of a single troubled sector that ran out of luck. This isn’t a single issue, such as the oil-price collapse. This is the list of a broader phenomenon: too much debt across a struggling economy. And now the reckoning has started.
So maybe the first-quarter surge of bankruptcies was a statistical hiccup; and for the rest of the year, bankruptcies will once again become a rarity.
Wishful thinking? The list only contains publicly traded companies that have already filed. But the energy sector, for example, is full of companies that are owned by PE firms, such as money-losing natural gas driller Samson Resources. It warned in March that it might have to use bankruptcy to restructure its crushing debt.
Similar troubles are building up in other sectors with companies owned by PE firms. As a business model, PE firms strip equity out of the companies they buy, load them up with debt, and often pay special dividends out the back door to themselves. These companies are prime candidates for bankruptcy.
Restructuring specialists are licking their chops. Reality is setting in after years of drought when the Fed’s flood of money kept every company afloat no matter how badly it was leaking. These folks are paid to renegotiate debt covenants, obtain forbearance agreements from lenders, renegotiate loans, etc. At some point, they’ll try to “restructure” the debts.
“There is a ton of activity under the water,” explained Jon Garcia, founder of McKinsey Recovery & Transformation Services.
Just on Wednesday, gun maker Colt Defense, which is invoking a prepackaged Chapter 11 filing, proposed to exchange its $250 million of 8.75% unsecured notes due 2017 for new 10% junior-lien notes due in 2023, according to S&P Capital IQ/LCD. But at a pro rata of 35 cents on the dollar!
Equity holders are out of luck. The haircut would “address key issues relating to Colt’s viability as a going concern,” the filing said. It would allow the company “to attract new financing in the years to come.” Always fresh money!
Also on Wednesday, Walter Energy announced that it would skip the interest payment due on its first-lien notes. In early March, when news emerged that it had hired legal counsel to explore restructuring options, these first-lien notes plunged to 64.5 cents on the dollar and its shares became a penny stock.
None of them has shown up in bankruptcy statistics yet. They’re part of the “activity under water,” as Garcia put it.
But these Colt Defense and Walter Energy notes are part of the “distressed bonds” whose values have collapsed and whose yields have spiked in a sign that investors consider them likely to default. These distressed bonds, according to Bank of America Merrill Lynch index data, have more than doubled year over year to $121 billion.
The actual default rate, which lags behind the rise in distressed debt levels, is beginning to tick up. Yet it’s still relatively low thanks to the Fed’s ongoing easy-money policies where new money constantly comes forward to bail out old money.
But once push comes to shove, equity owners get wiped out. Creditors at the lower end of the hierarchy lose much or all of their capital. Senior creditors end up with much of the assets. And the company emerges with a much smaller debt burden.
It’s a cleansing process, and for many existing investors a total wipeout. But the Fed, in its infinite wisdom, wanted to create paper wealth and take credit for the subsequent “wealth effect.” Hence, with its policies, it has deactivated that process for years.
Instead, these companies were able to pile even more debt on their zombie balance sheets, and just kept going. It temporarily protected the illusory paper wealth of shareholders and creditors. It allowed PE firms to systematically strip cash out of their portfolio companies before the very eyes of their willing lenders. And it prevented, or rather delayed, essential creative destruction for years.
But now reality is re-inserting itself edgewise into the game. QE has ended in the US. Commodity prices have plunged. Consumers are strung out and have trouble splurging. China is slowing. Miracles aren’t happening. Lenders are getting a teeny-weeny bit antsy. And risk, which everyone thought the Fed had eradicated, is gradually rearing its ugly head again. We’re shocked and appalled.
Corporate performance in Q1 sank into the mire because of the strong dollar? Ha! Read… Top Corporate Excuses for the Current Earnings Debacle, And What Gets Silenced to Death
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Remember this fact people. Credit apps where refused at the highest rate ever in March. Higher then the Lehman crisis by at least 25 pct! Nobody is lending any money to anyone unless you are the Feds. The market is on a tear right now with bad news is good news . Something very bad is about to happen .
90+ million not working under failed Obama policies while his cronies get rich at TBTF entities, private and federal. The market run-up is all smoke and mirrors and QE playing with fed funds. O&G will be purged of players that never should have been in the bidness anyway drilling bad wells on borrowed money. Whew, retiring south of the border is looking good…….
“90+ million”?
The amount of americans that are not employed is around 90 million in reality.
These are the long term unemployed, the ones who don’t show up in the unemployment stats the government loves to brag about.
Credit Crunchier 2.0; the can is fast running out of road.
Keep on stackin!
(You know, bullion)
Do you really think that gold will be a relief when no one has money and therefore no food. I suggest stacking cans of spam, tuna fish, and medical supplies.
Absolutely true and garden tools will be quite handy but in a few years when we start putting an economy back together, PM’s will be quite useful.
Interesting data. Looks like across the board in various industries with 5 in declining biz like 4 oil and 1 gold production companies out of top 15 BK basketcases YTD.
Wonder what are the YoY default and issuance rate for the junk bonds rated below BB and C as I suspect default rate is creeping up and the issuance is going thru the roof thanks to yield hungry investors who will soon find out why they were getting decent yield in ZIRP/NIRP environment and that gosh they can lose their principals…
With 6 years of pressure built up, and monumental amounts of debt hiding so, so many zombie companies, when this turns it’s going to happen so fast and so violently, there’ll be no time to change your investment positions.
You’ll either be on the right side or wrong side and there’ll be no bids for your stocks, bonds, real estate.
This one won’t be anything like 2008 folks, we’re heading into uncharted territory, as we’ve been in for years already, but this will be the consequences, not the illusion.
Good point as the companies small and big like AAPL and GOOG have been gorging on cheap as dirt debts and buy back shares to increase shareholder equity (yeah right) and more to boost their options by driving up fewer available shares ever higher while selling it to the naive soon to be bagholders.
The beginning of the end. Better get out of debt.
Somebody should have told the central banking cabal a long time ago that, as David Stockman recently observed, wealth and prosperity will NEVER come out of the end of a printing press.
That idea is the same kind of silly fairy tale as Rumpelstiltskin spinning gold out of straw. Yet virtually every central bank in the world has been printing money at warp speed.
When the Fed-inspired mountain of financial and accounting fraud finally blows up, it will be a horrific event that will devastate tens of millions of ordinary Americans.
Get ready. It’s coming one day, perhaps sooner than later.
Mark Twain opined once that chickens are the dumbest creatures in existence. He saw two chickens thrown into a snake pit overseas. The snake in the pit gobbled down one chicken, while the other flapped around in terrified panic. 5 minutes later the snake, now full of chicken went to sleep and the surviving chicken roosted on its back. I guess Mark never met a bankster, as the gold standard was still in place.
You know, as true as this is, and its as true as it gets that this is just starting.
But the real , real hard kicker, the one that will suddenly spring up and kick you in the face with an iron hoof is when the SME and self employed sector start to turn over.
As fast and fleet as they are on their feet, its when the waves of insolvency start to spread from the top down and when the income starts to dry up.
As inventive and imaginative in keeping going during the periods of this thin gruel and high taxes and vampire levels of blood sucking from the parasitic bureaucrats, that first wave that washes over the SME sector is like the first flood from a tsunami. Every factor that conspires against them comes together.
Late payment, non payment, supplier insolvency , bankruptcy, legal costs rise, bureaucracy rises, fees rise, and efficiency takes a deep hard hit.
Firefighting takes over from productivity and cash flows vanish and banks disappear from the landscape. PF becomes impossible, and covenants get used at ever increasing rates for the same cover causing a massive shortage.
But it doesn’t stop there, After the first wave of bankruptcies, the tide turns and washes half of whats left out to sea, this time clearing micro businesses and PG’s out and IVA’s and bankruptcies mount. but the effect of that is the spread back to the large corporate sector and the banks as more and more debt goes sour.
No amount of printing can save this mess as nothing is financially viable from the stupidity of a cabbage patch phone designer and having its tat produced in China getting valued as much as a large country economy and 200X valuations on non profit ever and gigantic loss making bio tech non entities.
There is no place left to build another 500 ghost cities and the infrastructure of half a continent in just a few short years on borrowed and recklessly conjured up cash.
There is in short no growth left to come, and a massive over supply not just of commodity but cabbage patch phones in China too, and those who can produce the longest and stave off bankruptcy the longest stand a chance. Now just like the frackers its produce like hell and cut prices, and that means more deflation and more and faster bankruptcies.
It is so depressing that so many people in business and everywhere are so clueless about economics in situations like this, and how they still have blind hope and faith leading them on.
I’m sure Hillary will sort it all out when she’s elected POTUS.
Depends on what you mean by ‘crash’. Lousy employment numbers? Already there. Terrible job market unless you’re a 20 hour per week bartender or waitress? Already there and sinking. Can’t afford to buy a house or a car? Already there.
Stock market crash? Think again. It’s the ONLY thing the Fed has been able to goose and it reliably drives money into the hands of the 1%. Not gonna happen.
Not gonna happen. Yeah, that’s what they said in 2000 and 2007. Everything has it’s limits. Even the Fed. They think they have things under control (actually I think they know things are already out of control and on the road to oblivion) but there will be a Black Swan event that will take the subfloor right out from under the market in such a way no one will be able to control it. This thing will eventually collapse under it’s own weight.
The value of these corporations, ultimately, is determined by the desire and ability of average people – consumers, if you like – to purchase the goods and services these corporations provide.
In this case, desire is irrelevant – because there is no abilility to purchase: That well is dry.
Most of these corporations are essentially empty shells.
They only question now is, which pension funds will be stuck holding these worthless investments by the financial firms?