Corporate bankruptcy filings fell to nearly 4-year low in May

Chris Hudgins, Lead Data Analyst, S&P Global Market Intelligence, joins Yahoo Finance to discuss the S&P’s new report on corporate bankruptcies and outlook on bankruptcies post-pandemic.

Video Transcript

ALEXIS CHRISTOFOROUS: Want to switch gears now and talk about corporate bankruptcies, because corporate bankruptcy filings actually slumped to a nearly four-year low in May as a lot of struggling companies decide to ride out their problems amid the broader economic recovery from the pandemic. S&P Global Market Intelligence actually recorded only 27 US bankruptcies in May. That is the lowest monthly count since July of 2017.

Joining us to talk about it is Chris Hudgins. He is Lead Data Analyst at S&P Global Market Intelligence. And Chris, good to see you. When I initially saw this number, I was a little surprised. Breakdown why the dramatic drop in corporate bankruptcies.

CHRIS HUDGINS: Yeah. Thanks for having me. So, like you said, we only had 27 bankruptcies in May, which was our lowest count since July of 2017. And similarly, the count for 2021 year to date is fairly low compared to other recent years, with only 2014 and '15 being slightly lower than that. Some of the potential reasons we're hearing [INAUDIBLE] find the low bankruptcy count is actually the hot capital markets.

So, the S&P 500 is up nearly 30% compared to the end of 2019 before the pandemic. There's a lot of investment interest going around the capital markets. And companies are looking to tap into these capital markets to essentially either refinance debt or raise capital, and push these debt obligations and their maturities back a bit, and hopefully, avoid the bankruptcy court.

We're also seeing some government assistance still trickle through. So, the lower interest rate from the Federal Reserve along with the prior PPP loan program kind of helped stabilize some of these companies and more or less kick the can forward a bit, and hopefully, avoid bankruptcy.

ALEXIS CHRISTOFOROUS: OK, but you can't kick the road-- kick the can down the road forever, right? So, what happens when all of that stimulus really does go away, and when the Fed inevitably starts to raise interest rates? Do you think we might see a spike in corporate bankruptcies then?

CHRIS HUDGINS: So, that's a good point. So, exactly right. So, should the capital markets dry up, and the companies not be able to raise the same capital in future months, we could see more companies have to look at the bankruptcy court as a way of dealing with their debt obligations. Hopefully, a lot of these companies that are in dire needs are starting to stabilize as the pandemic hopefully closes out. So, it's kind of up to companies to more or less stabilize themselves, if they're relying on these programs and federal assistance, before they get to the point where they run out of time.

ALEXIS CHRISTOFOROUS: What are companies doing sort of as a stopgap? I mean, are they reorganizing outside of bankruptcy court, sort of working their way around the system, and not officially filing for bankruptcy?

CHRIS HUDGINS: Yes. So, bankruptcy is obviously more or less the last resort for a lot of these companies. No company is actively pushing to file for bankruptcy. They're looking for other ways to stay afloat without necessarily going to the bankruptcy court.

So, one way to do that is you can look at the capital markets. File bonds in the markets. If you're a publicly traded company, the valuations are quite high, like I said.

So, they may be looking to raise common equity issuances, and get some cash, and pay back some of that debt obligations that are coming due. It could also be more or less restructuring outside of the bankruptcy court. So, meeting with their debt obligations and reaching some kind of deals to pay back this debt or push it down the road, further extend maturities, whatnot, without actually going through the bankruptcy court itself.

ALEXIS CHRISTOFOROUS: Chris, what were some of the sectors hit hardest by bankruptcies? I know that overall, the number was low. But was there sort of a theme or a pattern there when you saw which companies and which sectors were filing?

CHRIS HUDGINS: Yes. So, in 2020, kind of not really surprisingly, but we saw restaurants, hotels, and the apparel retail sectors file the most bankruptcies in 2020. And those are all in the consumer discretionary sector. We also saw a good amount in the industrial sector, specifically construction, as well as some of the energy companies look to bankruptcy court.

Mostly, the trends, as of which sectors are filing, is still mostly the same. It's still restaurants and hotels are filing the most amount of bankruptcies. But that's kind of declined since the 2020 peaks.

ALEXIS CHRISTOFOROUS: All right. And which areas do you think are most vulnerable as we continue to come out of this recovery, and again, a lot of that stimulus is going to start to evaporate? Stimulus that perhaps a lot of companies did use as a crutch. Are there any particular areas that you found through your data that seem to be more vulnerable than others?

CHRIS HUDGINS: Well, most of the most vulnerable companies throughout the pandemic were the ones that had those restrictions put in place, restaurants particularly, hotels, nobody was traveling. Those are getting-- operations are getting better for a lot of those companies. So, the outlook is more positive than it was earlier.

Kind of the question is, can they recover before their loan obligations are due, or are they able to restructure those loans, or reach some kind of deal to push them down the road? But those are still kind of the sectors to look out for. Is recovery going to be as quick as it needs to be in order to stay afloat?

ALEXIS CHRISTOFOROUS: All right, Chris Hudgins, Lead Data Analyst at S&P Global Market Intelligence. Thanks for stopping by today.