The Great Unwind Has Begun, Bankruptcies Soar

The junk-bond market lost money in July. Not a lot, 0.62%. But it did so after having already lost money in June. It was the third losing month so far this year, despite their “high” coupon payments that make these bonds look so juicy to yield-desperate fund managers.

Until recently, they were superb investments, riding up the credit boom. Junk-bond guru Marty Fridson, CIO of Lehmann Livian Fridson Advisors, explained it this way in a note for S&P Capital IQ LCD:

Strategists frequently take the easy way out in their year-ahead outlooks by predicting that the high-yield market will “earn the coupon.” At this stage, 2015 is shaping up as another year that makes false prophets of those who assumed, in the face of overwhelming experience to the contrary, that it would be free of both positive and negative shocks.

But it’s just the timid beginning.

The Fed hasn’t even raised interest rates yet, and the largest credit bubble in history continues to inflate. But it has begun to hiss hot air at the margins where the riskiest junk bonds, rated CCC or below, have plunged in value and where average yields have soared from a ludicrous low of 8% a year ago to over 13% now. That rout is far from over.

No matter how terrible and obvious the risks, fund managers, driven to near insanity by the Fed’s zero-interest-rate policy, held their noses and closed their eyes and picked up the worst junk, thus continuing to fund over-leveraged, money-losing, cash-flow negative companies that should have been restructured or liquidated years ago.

These investors provided the new money that kept the charade going and bailed out the old money. Energy companies are at the center. But it’s spreading beyond them. And all this debt on their balance sheets is now coming home to roost, under the supervision of the courts.

A few weeks ago, Fitch Ratings raised its high-yield default outlook for 2015 from a range of 1.5%-2% to a range of 2.5%-3%. For energy companies, it expected the default rate to jump to “the 6%-7% range.” The overall default rate would increase further in 2016, but to soothe our ragged nerves, it added that it would still be “well below peak levels seen during the Financial Crisis.”

Already, corporate Chapter 11 bankruptcy filings in July have soared 77% year-over-year, to 637 filings, the most in nearly three years, the Wall Street Journal reported, based on data from Epiq Systems

OK, April 2014, an otherwise super-calm year, was bigger, but that was due to one company that filed 71 petitions: Energy Future Holdings, former TXU, the largest utility in Texas that had become the largest LBO on the eve of the Financial Crisis.

The largest bankruptcies in July, according to Bankruptcy Data, included:

  • Coal producer and mining operator Alpha Natural Resources, with $10.7 billion in pre-petition assets.
  • Coal producer and exporter Walter Energy with $5.4 billion in pre-petition assets. Both followed the bankruptcy filing of Patriot Coal in May, its second in three years.
  • Oil and gas producer Sabine Oil & Gas, with $ 2.4 billion in pre-petition assets.
  • Oil and gas producer Milagro Oil & Gas, with $390 million in pre-petition assets.

The rest in July were smaller.

A word about the harmonious relationship between coal and natural gas: Coal as a fuel for electricity generation has been ravaged for years by the low price of natural gas and by a technological innovation, the rise of highly efficient combined-cycle natural-gas turbines that can be used for base and peak power. At the current low price of natural gas, prevailing more or less since the Financial Crisis, coal doesn’t have a chance.

Neither does natural gas. The price has been so ruinously low that specialized natural gas producers are approaching bankruptcy or have already filed [read… It’s Happening: Debt Is Tearing up the Fracking Revolution].

But it wasn’t all about energy. According to Fitch, in the first half of the year, companies in energy, metals (another brutalized sector), and mining accounted for 57% of the defaults. The rest were all over the place.

In July, that included one of Colony Realty Partners’ commercial real-estate investment funds which owns, according to Dow Jones’ Bankruptcy News, “six office buildings and 26 industrial buildings located near such metropolitan areas as Boston, Chicago and Washington, D.C.”

Plus grocery chain A&P (it’s second time in Chapter 11), taco chain restaurant Z’Tejas, grain transporter Trans Coastal Supply, and Uber loser New York City taxi mogul Evgeny Freidman, who’d asked the city for a bailout, claiming he was too big to fail, and when they refused, according to the New York Times, “he filed a petition to put many of his taxi medallion-owning companies into bankruptcy.”

And there were a slew of others.

Bankruptcy lawyers and restructuring gurus have been licking their chops. But the expected tsunami of new business hasn’t materialized yet. There were “pockets of business but still feels very lumpy,” Shaunna Jones, bankruptcy lawyer at Willkie Farr & Gallagher, told the Wall Street Journal. She’s still waiting for the really good times: “On the ground, it doesn’t feel like things have markedly or permanently picked up.”

But this is just the timid beginning of the Great Unwind. There is still too much money sloshing around, and most junk-rated companies can still get funding from desperate fund managers and lenders. They continue to cover losses, negative cash-flows, and debt payments with newly borrowed money. They won’t default until the spigot gets turned off. And one by one, these spigots are now slowly getting turned off.

Private Equity is a big force in the investment scene. It’s considered the “smart money” because of its acumen, insider knowledge, and ability to time the markets to profitably exit long-term illiquid investments. But recently, they’ve been doing something else. Read… Smart Money Dumps Assets at Record Pace, But Who the Heck Is Borrowing and Buying Like There’s No Tomorrow?

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  22 comments for “The Great Unwind Has Begun, Bankruptcies Soar

  1. Bill Carson says:

    this one is for you wolf

    chesapeake lost 4.15 billion last quarter and the big boss says. no worries . we will just drill more wells. its like you said earlier, their answer is more production. with iran coming on line, they just don’t get it. its the gambler in their blood. tomorrow i will make the big score. etc etc. its over for shale.

    • Wolf Richter says:

      Bill, glad you brought it up. Chesapeake is in big trouble. It’s bonds have started to sell off. That’s a bad sign. It means it will have trouble borrowing more money at reasonable rates. It has been cash-flow negative for two decades, living off borrowed money. When that sustenance becomes unavailable or too costly, it will start contemplating a restructuring of some sort.

  2. michael says:


    You are doing a great job of documenting the decline. As we watch the water rapidly go out to see, some of us have already run for the safety of high ground.

  3. Nick Kelly says:

    Well if coal doesn’t have a chance and ‘neither does natural gas’ then we don’t have a chance, because short- term for sure and probably medium- term (20 years ) we sure need one of them.
    I guess the meaning is that nat gas will still be available but in the hands of new operators who one way or another dump the debt.

    • Wolf Richter says:

      All it means is that the current NG price is unsustainable. When investors get tired of propping up NG drillers and stop funding them, well, production will go down, and shortages develop. The price will have to come up to make fracking profitable and cash-flow positive, and when it does rise to a sustainable level, coal will get another shot at survival as well, though it will never return to its former glory.

      • SUGuy says:

        There are no central bankers to prop up this industry. Markets will sort this out rather quickly.

    • Colin says:

      Canada and Argentina will be producing a lot of shale in the future. We’ll be getting it from them.

  4. Merlin says:

    Other leveraged losers are waiting in the wings as the fat lady sings…..and she will be singing an oil and gas dirge for the next couple of years.

  5. Spencer says:

    No unwinding at the gas pumps! Government scams, they are the ones in big trouble.


  6. bobby says:

    i suspect there should be soon a massive wave of bankruptcies in China, even with government stimulus. It’s amazing how many expensive iphones were sold in the past couple years in China, i bet sales will drastically decline there for apple.

  7. Ray says:

    The game is over. There is nothing that the Fed can do this time around to save the darkness that will ascend upon America very soon. It has already begun but no one is paying attention. The middle class will lose trillions this time around. The cracks that formed over the past 5 years are now about to break wide open. This market is going to devastate millions in the middle class. I have told people to take their 401k investments and IRA accounts and move them into money markets or CD’s within the family of funds or transfer the IRA out into a bank where their monies will be insured.

    • Petunia says:

      If you think your money will be safe in any bank you are not paying attention. It will be like Greece, in the beginning, bank closure, capital controls, no access to safety deposit boxes. Then it will get like Cypress, no need to go to the bank because there is nothing there.

    • derek says:

      FDIC only has $0.0001 for every dollar insured. and derivatives are higher on the priority ladder to be paid back. you are not insured.

      • Wolf Richter says:

        No insurance company anywhere has enough money to cover all possible casualty losses or potential liabilities all at once. In other words, if all 5,000 US banks collapsed all at the same time, it would be like a 9.0 earthquake hitting the entire US all at once. No insurance is going to cover your house, your car, your medical costs, anything… they’d all be gone. As would be the stock market, companies on US soil, etc. So really, “you’re not insured.”

        Imagining the theoretically absolute worst case scenario is an interesting intellectual exercise, but that’s all it is. It’s rarely a good foundation for every-day decision making.

        • Dead at 18, Buried at 65. says:

          Hello Wolf,
          From what I understood since last two years after the MF Global Debacle, was how the FDIC only has $100 billion “officially” to cover bank account insurance claims! -Even then, it was still not clear at that time if it had any real funds to cover any losses at all.

          Also, all readers should be warned that banking laws have been changed so that the “status” of all depositors has become that of an “uninsured creditor/shareholder”. Therefore, all bank accounts are unwittingly, automatically, made into “bail-ins” for all depositors!

          Hence, proving true that proverbial saying,

          “If you do not hold it, you do not own it”.

        • Wolf Richter says:

          I’d like to add that the money the FDIC has is as “real” the Treasuries that people hold in their brokerage accounts. These are “real funds” until they aren’t. But I bank on it that they’re real for now.

    • CrazyCooter says:

      Cash in a safe deposit box is better (and has the same interest rate – LOL). Another option is Treasury Direct, because, lets face it, when the Treasury defaults you got bigger problems.

      I don’t like banks or MM’s at this point and only use them if the above options are not available. Still digging out of debt though, so no huge piles of money for me until I am a free man.



      • Petunia says:

        Many people think that money market accounts are safe because you can’t lose money. They forget or don’t know that MM funds broke the buck as they say and went below a dollar of value. It is possible for them to fall way below the buck if there is no demand for underlying commercial paper.

  8. Julian the Apostate says:

    Alas, Babylon. I continue to put one foot in front of the other. Preps are done, I hope for the best but expect at minimum a Greater Depression. Celente has gone out on a limb and called for a crash by year end. I’m pouring as much love and info out into those I know and love as I can. I’m even beginning to ‘network’, something I’ve never done.

    • Dead at 18, Buried at 65. says:

      Hello Julian,
      Here! Here!
      Unfortunately, the apathy I have seen is so appallingly dire, I am almost discouraged myself. – For the want of trying! I am filled with such dismay, I wonder if I ever should have bothered at all?

  9. CashBoy says:

    “It will start contemplating a restructuring of some sort”

    I love the terminology.
    You mean they will knock the creditors for a slice of what they owe?

  10. Libertybella says:

    I don’t think money markets or CDs are even safe….I don’t think anything is safe…even gold and silver will be manipulated lower….I guess the only safe thing is food producing land, mortgage free, with fresh water source….can it get that bad???!!!

Comments are closed.