Weirdest Economy Ever, as 20 million people still claim unemployment benefits.
By Wolf Richter for WOLF STREET.
Total bankruptcy filings by consumers and businesses in the US in 2020, across all chapters of bankruptcies, plunged by 30% from 2019, to just 529,000 filings, according to legal-services provider Epiq Systems. This was the lowest number of total bankruptcy filings since 1986.
The plunge in filings was largely driven by consumers, who account for 94% of total bankruptcy filings, and who were awash with stimulus money and extra unemployment benefits (historic Epiq data via American Bankruptcy Institute):
Bankruptcy filings by consumers alone plunged by 31% from a year ago to just 496,000 filings, the lowest since 1987. Following the Financial Crisis in 2011, consumer filings had surged to 1.38 million as consumers were unwinding their credit card debt, mortgages, and HELOCs. But not during this crisis. Though 20 million people are still claiming state or federal unemployment benefits, the opposite happened in the Weirdest Economy Ever.
Under a flood of stimulus money, consumers triggered a historic drop in credit card debt and a sharp drop in credit card delinquencies. Auto loan delinquencies also declined. But 5.5% of all mortgages are still in forbearance where borrowers don’t have to make mortgage payments – 2.7 million mortgages! And eviction bans allow renters to skip rent payments. And even consumers that were in arrears didn’t have to fend off creditors and landlords with a bankruptcy filing (historic Epiq data via American Bankruptcy Institute):
Total commercial filings under all chapters fell 15% to 33,000 filings, powered by a 40% drop in commercial Chapter 13 filings and a 14% drop in commercial Chapter 7 filings.
But commercial Chapter 11 filings – when a business attempts to restructure its debts while operating rather than liquidating – surged 29% to 7,128 filings, the highest since 2012 when the effects of the Financial Crisis were winding down.
These filings include some of the biggest names in retail and shale oil & gas, but also thousands of small businesses that ran out of financial rope, with their businesses either shut down or activities diminished to where they could no longer deal with their obligations:
In terms of larger companies that are publicly traded, or private companies whose debt is publicly traded – this is based on data from S&P Global – Chapter 11 bankruptcy filings rose 9% in 2020 after having already surged 13% in 2019, to 630 filings, eking past 2011 (629 filings), making it the largest number of filings since 2010:
These companies include the most illustrious examples of the brick-and-mortar meltdown that has been crushing mall stores for three years, but sharply accelerated during the Pandemic: J. C. Penney, Ascena Retail Group (Ann Taylor, LOFT, Lou & Grey, Lane Bryant, Cacique, Catherines, and Justice; it had already shut down Dressbarn in 2019), Neiman Marcus, Tailored Brands (Men’s Wearhouse, JoS. A. Bank), etc.
Another outstanding group of the Chapter 11 filers, vintage 2020, were the members of the Great American Oil & Gas Bust, such as Diamond Offshore, MC Dermott, Chesapeake Energy, California Resources, Denbury Resources, etc.
Among these larger companies, Chapter 11 filings, by sector, according to S&P Global:
- Consumer discretionary: 125
- Industrials: 84
- Energy: 69
- Healthcare: 57
- Consumer staples: 34
- Materials: 27
- Real estate: 25
- Information tech: 25
- Communication services: 22
- Financials: 14
- Utilities: 6
But not included in the bankruptcy filing data are the many small companies that shut down quietly, with the owners working out deals with their creditors, landlords, banks, and credit card companies, without resorting to a bankruptcy filing. Many small retail stores, restaurants, and services businesses, such as hair and nail salons, fall into this category. Tens of thousands of restaurants are said to have shut down permanently due to the Pandemic.
How will all this unwind?
In terms of consumers, they either face a reckoning when forbearance programs and eviction bans expire; or they face an iffy situation where the can gets kicked further down the road, with further extensions of forbearance programs and eviction bans.
Even if landlords cannot evict tenants, they can sue them for past-due rents, get a judgement, and execute on that judgement with collection efforts, and tenants may see a bankruptcy filing as the only exit. So this mess may well get sorted out in 2021 in a way where consumer bankruptcy filings spike.
Some large businesses have hugely benefited from bailout programs under the stimulus packages, which granted tens of billions of taxpayer dollars to Corporate America – what we now call taxpayer capitalism, where taxpayer capital is transferred to corporate shareholders and bondholders. In particular, shareholders and bondholders of airlines have benefited from taxpayer capitalism, without which a good bunch of them would have participated once again in airlines restructuring their debts in bankruptcy courts.
It may be that policy has shifted to extend-and-pretend for evermore, that bailout and stimulus packages will follow in an endless chain. But I doubt that.
Somehow this will need to get unwound. Tenants will have to pay their rents or leave. Landlords will have to pay their mortgages or hand the buildings to their lenders. Homeowners will eventually have to make mortgage payments too, even if the mortgage is modified, or sell the home or send the keys to lenders. Airlines are now burdened by a huge mountain of debt, and they will have to figure out how to stop the cash burn and survive with that debt.
Cruise operators and other businesses whose revenues have collapsed to near-zero for 10 months have raised many billions of dollars in equity and debt capital under the easiest credit conditions ever, where yield-starved investors fell all over each other to fund them, and thus dodged having to file for bankruptcy. They now have more debts than ever, they have fewer ships, and practically no revenues yet, and they have to figure out how to survive this without filing for bankruptcy.
Movie theater chains and other entertainment venues fall into the same category, except they now face a structural shift: consumers and studios have switched to streaming – a move that has long been underway but sharply accelerated during the Pandemic. And the movie theater business may never come back like it was before.
There are many other businesses where the old normal has simply evaporated and the new normal is going to be very tough. This includes the office sector of commercial real estate, which is getting hammered by working from anywhere. Many employees will eventually return to the office, at least on a part-time basis, but companies have now seen the light: They don’t need this huge office footprint. And they can cut costs by reducing it. Restructuring that sector, which hasn’t even started yet, will take years.
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