Bankruptcies at two speeds in the United States

COFACE Report

As the COVID-19 pandemic hits the United States hard, Coface forecasts in its main scenario that the country's GDP will contract by 5,6% in 2020, before recovering by 3,3% in 2021.

However, this forecast is threatened by a resurgence in several states, which is already pausing or even reversing the recovery of activity after the massive lockdown in April.

The steepest drop in GPD should be followed by a massive increase in business bankruptcies. However, since the beginning of the crisis, these have fallen, as a result of a significant decrease in bankruptcy filings under Chapter 7 of the law. United States Federal Bankruptcy (settlement).

At the same time, the number of companies filing for protection under Chapter 11 (reorganization) has increased sharply (+48% year-on-year in May), indicating that bankruptcies are already occurring. Coface foresees a rebound in bankruptcies starting in the second half of 2020, with an increase of 43% expected between the end of 2019 and 2021.

Furthermore, estimates of Coface These figures show that "zombie" companies, which have grown over the past decade to represent more than 6% of businesses in 2019, could also face bankruptcy in the coming months. The number of struggling companies is also likely to multiply as a result of mounting debt.

Misleading bankruptcies fall

In 2019, there was the first annual increase in bankruptcies since 2009, with a 2,5% increase in proceedings initiated in 2019 compared to 2018. Data published so far in 2020 shows that, after a jump of 21 % in January, bankruptcy filings began to decline beginning in February.

As in Europe, measures to support the liquidity of companies can explain this trend, together with the possible waiting attitude of debtor companies and the closure of courts.

However, given the magnitude of the shock and taking into account that the support measures should gradually expire, it is likely that in United States corporate insolvencies accelerate.

If we review the health of companies' balance sheets, it stands out that the aerospace, retail, automotive and energy sectors are the most vulnerable to this situation.

Bankruptcies and "zombification" threaten indebted companies

"Zombie" companies, which continue operating despite precarious solvency and profitability, could also be pushed into bankruptcy in the coming months. Furthermore, with more companies forced to take on debt to cope with lost revenue, the threat of these struggling businesses multiplying is compounded by the threat of bankruptcy.

Source: COFACE

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