The Big Unravel: US Commercial Bankruptcies Skyrocket

Instead of that promised “escape velocity.”

This year through June, there have been 91 corporate defaults globally, the highest first-half total since 2009, according to Standard and Poor’s. Of them, 60 occurred in the US. Some of them are going to end up in bankruptcy. Others are restructuring their debts outside of bankruptcy court by holding the bankruptcy gun to creditors’ heads. In the process, stockholders will often get wiped out.

These are credit fiascos at larger corporations – those that pay Standard and Poor’s to rate their credit so that they can sell bonds in the credit markets.

But in the vast universe of 19 million American businesses, there are only about 3,025 companies, or 0.02% of the total, with annual revenues over $1 billion; they’re big enough to pay Standard & Poor’s for a credit rating.

About 183,000 businesses, or less than 1% of the total, are medium-size with sales between $10 million and $1 billion. Only a fraction of them have an S&P credit rating, and only those figure into S&P’s measure of defaults. The rest, the vast majority, are flying under S&P’s radar. About 99% of all businesses in the US are small, with less than $10 million a year in revenues. None of them are S&P rated and none of them figure into S&P’s default measurements.

So how are these small and medium-size businesses doing – the core or American enterprise?

Total US commercial bankruptcy filings in June soared 35% from a year ago, to 3,294, the eighth month in a row of year-over-year increases, the American Bankruptcy Institute (in partnership with Epiq Systems) reported today. During the first half, commercial bankruptcy filings soared 29% to 19,470. Among the various filing categories:

Chapter 11 filings (company “restructures” its debt at the expense of stockholders and unsecured creditors by shifting ownership to creditors, but continues to operate) soared 36% to 499 in June and 25% in the first half to 3,220.

Chapter 7 filings (company throws in the towel and “liquidates” by selling its assets and distributing the proceeds to creditors) jumped 28% in June to 1,909, and 25% in the first half to 11,211.

Like so many things, bankruptcy is a seasonal business – and one of the few truly booming businesses in the US at the moment. While stockholders and some creditors pay the price, lawyers and many others on the inside track, including hedge funds and private equity firms that are able to pick up assets for cents on the dollar, have a lot to gain. And if a company emerges with a more manageable debt load, it too might eventually prosper, though multiple bankruptcies are not uncommon.

Commercial bankruptcy filings reach their annual peaks in March or April, and this year is no different. While June filings edged down by 64 from May, the five-year average seasonal decline for the period, at 275, is over four times higher. And the seasonal decline in June was the lowest for any June since the Financial Crisis.

This chart shows the seasonality and how bankruptcies have fallen since the Financial Crisis, until they hit the low point in September 2015. In June, the worst June since 2014, bankruptcy filings were up 49% from September:


Defaults and bankruptcies are indicators of the “credit cycle.” Easy credit with record low interest rates – the handiwork of the Fed with QE and ZIRP – has allowed businesses to borrow beyond their ability to carry this debt as everyone had been drinking the “escape velocity” Kool-Aid, the notion that growth in the economy would finally and very soon kick in and reach escape velocity. Year after year, for six years straight, it failed to kick in.

Hopes are now running into reality, which is a slowing economy in the US and globally, just when corporate debt has reached previously unimaginable levels, as this chart of total commercial and industrial loans at all commercial banks in the US shows:


In October 2008, there were $1.59 trillion of these commercial and industrial loans outstanding. As of May 2015, there were $2.05 trillion outstanding, a 29% jump from the peak of the prior craziest credit bubble the world had ever seen to this even crazier credit bubble. And so, instead of that promised “escape velocity,” the bankruptcies have started to kick in.

Junk bonds swooned late last year and early this year as a consequence of billowing credit problems. But if you bought the crappiest of them on February 10, you’ve made a killing unless the company defaulted, in which case you got killed. So much money poured into junk bonds since then that prices soared even for the riskiest near-default issues. But is that honeymoon already over? Bad breath of reality next? Read…  What the Heck is Happening to Junk Bonds?

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  45 comments for “The Big Unravel: US Commercial Bankruptcies Skyrocket

  1. Sgt Milstar says:

    Wolf, will the outcome of these bankrupt companies turn out like the Hostess products? Twinkies and Ding-Dongs downsized to smaller portion sizes.

    I just caught that the company is being sold to a Hollywood billionaire.

  2. night-train says:

    Borrow yourself to fame and fortune. Haven’t I seen somebody selling a book on how to do this on late night TV? So, I guess if you aren’t finding success with your venture, just keep borrowing. Or is it leveraging?

  3. Agnes says:

    A case in point is Molycorp. Now listed as mcpiq it is a three cent stock…but it is still trading and has petitioned (succeeded?) in coming out of Chapter 11. At issue is the only American “rare” earth/thorium mine. Bondholders want the land and the trade secrets, but not the mine clean-up costs–and would like to sell it to a Foreign Power which requires a waiver. Paging Marie Antoinette! Paging Marie Antoinette!

    Disclosure: I do not own this stock but have mentioned it to family and friends because it would amuse my Dad if it went up and at 3 cents it is a cheap thrill.

    • MC says:

      That’s a job for vulture funds, not beheaded Hapsburg queens. ;-)

      Oh, and we should really have a discussion about Rare Earth Elements (REE), for no other reason it shows what happens when China gains control over a given commodity. Or as an example of why Japan’s sovereign debt had gone out of control: Tokyo has contracted Mitsui Kinzoku to exploit REE on the ocean floor near Marcus Island. Corporate rent seeking at its best!

      • illumined says:

        The Chinese gained control over it largely because the mining of rare earths generates huge amounts of extremely toxic waste and ever tightening environmental regulations made it almost impossible for these kinds of mines to operate profitably in western countries, in China their attitude about this problem is quite different hence their market share.

        • Chicken says:

          The Japanese are global market leaders in terms of toxic waste creation. Not sure how they intend on capitalizing the technology or if it’s even possible.

        • MC says:

          Actually the only place in Europe where mining REE’s makes economic sense is in Estonia… from thousands and thousands tons of mostly toxic wastes left over by Soviet-Era thorium and uranium extraction and refining.
          China is “blessed” by some of the highest concentrations of REE’s in parts of Inner Mongolia, especially Bayan Obo, very much like during the 60’s and 70’s the US were blessed by the Mountain Pass Mine.
          This mine closed down because dirt cheap REE’s from China made it uneconomical to operate. In 2012, thanks to much much higher REE prices, it was reopened but was shut down again late last year due to Molycorp’s financial woes.

          As said, it would warrant its own article/discussion.

          As said it would warrant its own article

  4. Silly Me says:

    Sadly, the system is so rigged that you can make more money by going bankrupt than by running a good business. It’s a bankers’ world with money that exists only on paper as long as people believe it does. As the few richest interest groups have already monopolized most financial opportunities, the rest of us are paying for the party and believe that this the best of all possible worlds.

    • gregory k. lester says:

      Yes the system is rigged. Stipulated. The story remains the same with the gambling and repackaging.

      First the huge profits … Then the deregulation … Followed by the bigger more exotic bets and then the rigging of the game. Money has to go somewhere so the easy money is followed by the insider money then the lobbied edge and lastly by the exotic or upriver money like articulated in the example discussed above.

      Finally the wreckage is viewable and the transfer is made by the gamblers and insiders and politicians to the people .. All the people whos damn fault it is anyways. Thus begins the new cycle.

  5. Meme Imfurst says:

    I am a small businessman and most of my friends are too. All of our businesses happen to catered to medium to high discretionary incomes….mostly art and fine art, original and handmade decorator items, most one-of-a kind and of American origin.

    As a year round high demand vacation spot, We have a high pass thru of wealthy individuals from the world and the USA.

    Since early April the activity has vanished, as if a switch was flipped. Not slowed, but vanished. It is not that they are going somewhere else, they are simply not going anywhere and the wallet is tight to the hip. These are the people the FED and Obama depended on to spend their merry way and create a trickle down prosperous America.

    I see ‘big sale’ in the windows of expensive ‘name brand’ retailers, not the kind of items that you buy on line . You can sense the ‘available’ sign will soon be taped to the window by some real estate agent expecting to still get 10k a month for 600sf. The delivery services are coming so early now that they have little to deliver or pickup. The mail lady comes about 10AM instead of 2PM.

    I sell a bit of personal audio collectables from time to time on eBAT, but you can give something away there now and it sits. I hear that from friends all over the country that nothing is selling on ebat and hasn’t for months

    This feels like 2008 and my gut tells me to keep the cash close. 43 years and this time it feels like the clock is striking 12 not 9 for businesses.

    There is a damn good reason why business are holding back on spending and why others are going broke….the damn FED, QE, etc.
    Now their monkey business has come to my hometown so it has to be in NYC, SF, LA, etc., too.

    • David in Texas says:

      Meme Imfurst,

      Just curious where you are located?

    • wholy1 says:

      Reality can be a bitch – especially when One is unprepared when “it comes a knock’n” My small biz succumbed in the 2007/08 “wake-up call” – which I now see to be a blessing. I suspect the “up-scalers” are realizing that they are becoming the “next in line” for the [D]elites/PTB’s (Psychopaths That Bugger) on-going wealth consolidation/transfer operation. And it’s tough to have any empathy for said complacent “up-scalers” who have considered themselves so insulated and “comfortably loved” (Pink Floyd). When most of the remaining real wealth has been aggregated with the 0.001 per-centers, it will be interesting to see what proceeds said [D]elite’s unnoticed exit to their remote, heavily-fortified redoubts. For starters, probably another big-ass war. Oops! Probably going to get censored . . . . AGAIN for “telling it like it’s GOING TO BE.

    • Petunia says:

      A couple of months ago we were in the market for a new sofa. We lost the last one in our move, but it need replacing anyway, over ten years old. The prices were either ridiculous or we are a lot poorer than we realized. The average price was in the 3-6K range. We considered financing one we liked but the store credit card was shy of 30%. This is why people are not spending. The imaginary inflation is killing us.

      • Ray says:

        Look around at Craig’s List. I could barely get $500.00 selling a nearly brand new living room set that included two leather couches, a coffee table, and two end tables a few months back. People are constantly getting married, and consolidating things. Then there are the estate sales. The deals are there you just have to look.

  6. Meme Imfurst says:

    Mr. Wolf…question.

    If the small businessman is the corner stone of the economy, and creator of ‘most’ jobs in America, why so little attention to and support for their plight? Small meaning 10 or less employees, but still faced with ever increasing expenses, regulation, taxes, fees, etc. …. as if their pockets are as deep as a stock traded corporation.

    The rhetoric by Politians on the importance of Small business doesn’t match up with what little guys take on the nose… everyday from those same Politians.

    • Petunia says:

      Small businesses are easy targets for greedy politicians, they have just enough money to be shaken down, but not enough to hire expensive lawyers and lobbyists to push back. Look at what they DO not what they SAY. Vote them all out while you still can.

      • ERG says:

        “Vote them all out while you still can.”

        Truer words have never been spoken!

      • TheBloomIsOffTheRose says:

        “Vote them all out while you still can”, but vote in Trump, one the biggest vultures and psychopaths in the nest?

        It’s the culture, not the person. Voting them all out will not change an entrenched cultural infrastructure that nurtures vultures and psychopaths.

        • Petunia says:

          As a native New Yorker I got to observe Trump in the press over decades. He comes from a family that made its money making things not taking things. The real vultures and psychopaths, IMHO, are the Clintons, and I even voted for him the first time.

        • ERG says:

          Name-calling and demonizing are not going to work this time around, TBIOTR.

          “Voting them all out will not change an entrenched cultural infrastructure that nurtures vultures and psychopaths.”

          Maybe not. But its a good start.

        • Singapore Trading says:

          +1 the Clintons are nothing compared to Trump and others. They are a sideshow and are politicians not developers. Trump created what he did based on the wealth his family had/gave him. From the ‘ground-up’ is not something attributable to Trump. Some of you need to watch less Fox News and get out more.

          Trump is a failure and the comments about taking things applies to either side of the aisle. Since Congress is Republican why are they not investing in the infrastructure renewal that is needed in the USA. That should concern you more than Clinton or Trump. Congress pays for things no one else. Again many of you are misguided about how your own gov works.

    • ERG says:

      From the point of view of The State, a small business may be the most subversive social institution in existence after religion and marriage.

      Their configuration is completely orientated towards independence, self-sufficiency, self-reliance, and total defiance of the rules – and they THRIVE while they’re at it! There may be no other act of non-conformity so powerful as A PRIVATE, FAMILY OWNED BUSINESS!

      They can keep one set of books for the IRS and another for themselves; they can operate on an all-cash basis when and where ever they want; they can cooperate with other small businesses to control their operating costs and required selling prices; they can employ family members at below minimum wage salaries and defy work hour regulations; they can dominate and support localities for mutual benefit.

      The list is just about endless, and that makes them the ENEMY of The State.

  7. ERG says:

    “If the small businessman is the corner stone of the economy, and creator of ‘most’ jobs in America, why so little attention to and support for their plight?”

    Follow the money:
    How much do they contribute to political parties in comparison to the Fortune 500?

  8. Ptb says:

    It has occurred to me that when one can borrow huge amounts, with little to no collateral….perhaps the real business should be borrowing and not paying Back.

    • Vernon Hamilton says:

      …perhaps the real business should be borrowing and not paying Back.

      That is in fact the Donald J Trump model of success.

      • Drumpfabooie says:

        Don’t overlook his mob crime families model. Which is probably what the wall is about.

        So why did Trump repeatedly do business with mob owned businesses and mob-controlled unions? Why go down the aisle with an expensive mobbed-up concrete firm when other options were available?

        “Why’d Donald do it?” Barrett said when I put the question to him. “Because he saw these mob guys as pathways to money, and Donald is all about money.”

  9. Bornino says:

    Government does not want small business. The mass of new regulation proves it. Gov feels that it is easier to control tax cheating by big business and they can force big business to implement welfare programs like expensive health care, minimum wage, pension and famiy leave that require a lot of cash and reporting.

  10. John S says:

    You are thinking about the European business model.

  11. OutLookingIn says:

    When everything is said and done… Oh! Wait…
    James Comey did that yesterday. Carry on.

  12. Chicken says:

    Another central banker pump and dump drawing to a close, now transitioning to the dump stage.

    Thank you Federal Reserve for maximizing the agony of economic decay on behalf of the best interests of your insider friends.

    Duck and Cover………

    • Paul Easton says:

      Can’t you hear them singing?

      They are singing the old Mingus standard:

      O Lord I wanna
      Eat that chicken
      I wanna eat it,
      Eat that chicken pie!

  13. Chicken says:

    Okay let’s see, 10 year rate is now 1.39% as I write this yet last I checked consumer rate on credit cards is well north of 22%?

    So plainly low borrowing rates aren’t for everyone unless mom and pop are lending, only a select few can borrow at 1.39%?

    Great work if you can get it.

  14. It is now “later,” for everyone that decided to “buy now and pay later.”

    RE: …though multiple bankruptcies are not uncommon.

    Easy solution is to amend the bankruptcy code to mandate bankruptcy under chapter 7 [liquidation] rather than chapter 11 [reorganization] for any corporation filing for bankruptcy within 5 years of a previous bankruptcy.

    It is also suggested that an analog to the Accident Investigation Board of the NTSB be established to analyze all major corporate bankruptcies, and a representative sample of smaller corporate/LLC bankruptcies, to establish the cause(s), and to suggest changes in legislation/regulation to minimize occurrence, in public reports.

    It should also be helpful to maintain a public registry of individuals [e. g. directors, officers, consultants] and firms [e. g. hedge funds, private equity, etc.] involved in repeated bankruptcy actions to identify any “angels of death.”

  15. Alex says:

    I agree with the article and most comments, but I live in Boston which seems like an epic bubble or foreign world compared to the rest of the world. Real estate is soaring; software and biotech is booming (new construction is everywhere); traffic jams are at epic proportions. When does it stop? A 1200 sq ft condo in Brookline was expensive at $130,000 in 1994, is a one-day sale over $700,000 in 2016.

    • Wolf Richter says:

      Only $700K?? Was that some kind of dump? Because a halfway decent place of that size (if you can even find one that big) in San Francisco would be well over $1 million. And if it’s a nice place of that size with a view and a garage, gosh, you’d have to dig pretty deep.

      • whatthe says:

        Who in hell can afford that? Are the banks giving 100 year mortgages now?

        • Wolf Richter says:

          Well, not enough people, that’s for sure. That’s why prices in the current condo glut in SF have already hit a wall.

        • MARK says:

          Rich “foreigners”, they don’t need no stinkin’ mortgage-paying with suitcase full of cash ;-)

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