A wave of corporate bankruptcies has  claimed 3,604 businesses  in the first half the year, up from 2,855 from the same period last year, according to Epiq Global, a firm that tracks data from US bankruptcy courts. With no vaccine for the virus yet, the coronavirus is still holding back the US economy, and bankruptcy filings are likely to accelerate, experts say.

“Companies in sectors like energy, retail and hospitality will continue to be under substantial pressure and see a lot of bankruptcy filings,” said Peter Friedman, a leading bankruptcy and restructuring litigator at law firm O’Melveny.

A pullback in consumer spending has hit retail stores hard, which were already facing tough competition from e-commerce giants like Amazon. Energy companies have also been hurt as the crisis sapped the demand for oil after travel and economic activity came to a screeching halt.

Under the Paycheck Protection Program, an aid program for small and mid-sized businesses, the government has issued 4.9 million loans totaling $521 billion as of June 30.  The program was set to expire on June 30, but Congress has extended it to Aug. 8.

Experts aid can help sustain businesses, but this model can’t be the panacea.

Despite receiving PPP loans, many companies are still going bust. Toojay’s, a popular Florida-based deli chain that had received $6.4 million in stimulus funds, is one of them. Almost one out of every 12 companies that have gone bankrupt since early April got PPP loans, according to a research firm bankruptcydata.com.

“PPP obviously can be helpful, but fundamentally if there is a loss in revenue or too much leverage on the business, it’s a different picture,” said Friedman.

Many debt-saddled firms could begin to file for bankruptcy under Chapter 11 if the economy doesn’t rebound.

Chapter 11 of the US bankruptcy code allows a troubled company to restructure its debt while continuing to operate. If the company fails to pay its creditors, its assets are liquidated under Chapter 7. June was a particularly bad month for companies this year. Commercial Chapter 11 filings were up 43% over June of last year, with 609 new filings, Epiq Global said. A total of 1,0121 companies were liquidated under Chapter 7 filings this year so far.

One of the biggest corporate casualties under Chapter 11 was Hertz, after stay-at-home orders   whacked its business. Already sitting on $17 billion in debt, the company gave in.

Household retailer J.C. Penney also filed for bankruptcy, after it struggled to service $4 billion in debt. The company has announced to close its 250 stores by the end of summer 2021.

“Going into recession with a heavy amount of debt is almost a recipe for bankruptcy,” Anthony Karydakis, Adjunct Professor at New York University’s Stern School of Business, said.

Karaydakis said companies that managed to survive the intense lockdown period, “are still not out of the woods yet.”

The piling up of debt and falling revenue has left companies teetering on the brink of bankruptcy.  Victoria’s Secret and Best Buy are among many that are on the edge.

US companies have piled on more than $11 trillion in debt over a decade, fueled in part by low interest rates from the Federal Reserve. For companies looking to raise funds, low interest rates make debt attractive because they lower borrowing cost. Cheap debt drives firms to take more debt at low interests from their creditors. But accumulating too much debt can be dangerous, especially when the economy slows.  Experts say many companies are likely to default on their debt payments now that the pandemic has hurt sales.

“Taking debt when the economy is doing ok is relatively manageable, but debt starts becoming a threat to the existence of certain companies when the economy slows down,” Karydakis said.

“Companies can’t hang around without making payments on their debt.”

Karydakis also says as more companies go bankrupt in the coming months there will be more job losses in the US. At 11.1%, unemployment still remains higher than at any point during the Great Recession. Karydakis noted it’s possible bankruptcies could keep unemployment elevated for months to come.

“Companies are going to lay off as more bankruptcies pile up. This will slow the pace of recovering the job market. This is a story that is not going away,” he added.

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To survive the crisis, Disney borrowed $11 billion by selling bonds, joining a growing list of investment-grade companies that have issued over $1 trillion in the first five months of the year.  The amount, equivalent to the worth of bonds sold in 2019, adds to the $10 trillion of the US corporate debt and worries economists, who say some of the debt will blow up and make the economic recovery tough.

 “Corporate debt issuance is crazy at the moment,” said Anthony Karydakis who teaches financial markets at New York University’s Stern School of Business.

Of the $1.038 trillion, debt worth $706 billion was issued by the investment-grade companies between late March and May. The frenzy triggered by Federal Reserve chief Jerome Powell’s announcement that the bank will buy corporate bonds to prop up companies hit hard by the economic shutdown induced by the coronavirus outbreak.

A total of  724 businesses filed for bankruptcy in May, up 48 % as compared to the same month in 2019, said a report by legal-services firm Epiq Global. Among them were major companies like J.C. Penney Co., Neiman Marcus Group Inc., J. Crew Group Inc. and Hertz.

Karydakis said Fed’s “unprecedented” decision to buy corporate bonds was like a “lifeline” to the troubled companies who went on a borrowing binge.

Embattled aircraft maker, Boeing, raised $25 billion in its April offering while oil giant, Exxon Mobil sold $18 billion in bonds after oil prices tanked. General Motors, Ford, General Electrics and others have issued debt in enormous proportions.

Jim O Sullivan, Chief US Macro Strategist at TD Securities, said more corporate debt is “adding to the financial instability down the road.”

“The companies know the Fed is going to keep the interest rate zero for years and years. This helps the borrow at low interest,” said Sullivan. “Already the level of corporate debt was a record high and more borrowing would add to the vulnerability.”

Karydakis and Sullivan agree that Fed’s decision was much needed to salvage the corporations, but they say risk down the road is that some of the debt will blow up.

“You don’t have only GM and other investment-grade companies, but also less-than-stellar rated companies. If they are not outright junk but borderline junk. Some of that debt at some point will not make it,” Karydakis said.

The bonds of many investment- grade companies, like Royal Caribbean, were downgraded to junk status after the pandemic wrought havoc with their business. After raising $3.3 billion, the cruising line has announced to borrow more.

Investment grade is a rating assigned to a company’s bond, which means it involves a low risk of default. Junk bonds are a high-risk debt issued by a financially troubled firm or a start-up. They are also called high-yield bonds.

The Fed has said it will buy investment-grade as well as junk bonds.

Issuance in the US junk bond market through June 12 was a 15-year record high. It was tracking at its busiest pace for any June on record, with $23.88 billion priced through June 12, accordingto S&P Global.  It’s not the only beleaguered business but healthy companies that are scooping up low-interest loans.

Netflix, which benefited from the growing subscribers due to the lockdown, issued $1 billion in bonds to finance more shows and movies. The streaming giant has been issuing bonds before to boost its liquidity. Oracle also raised $20 billion by issuing investment-grade bonds.

Karydakis said if debt issuance stops now, the chances of the US economy to survive will be grim.“Jerome Powell (the Fed chief) has identified this as a risk but didn’t make it as an argument that he would like the debt issuance to stop,” he added.

“It’s a little bit of a trap situation. He is in the middle of throwing the kitchen sink at the whole thing to keep the economy floating,” he said.

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