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Default rates are surging amid the coronavirus pandemic

Brian Sozzi

COVID-19- related corporate bankruptcies and debt defaults in the U.S. are on the rise. And it’s likely to get much uglier in the months ahead, despite efforts by lawmakers to shore up corporate balance sheets.

“So far this year, we’re almost running at a rate of double the defaults of last year,” said S&P Global CEO Douglas Peterson on Yahoo Finance’s The First Trade. “We think that there is going to be an increase in default levels up to potentially 10% of the high yield debt [markets].” In April, the rate was 3.9%.

Peterson would know: One of his firm’s main profit centers is to issue ratings and analysis on various corporate debt issuances.

This month alone has brought a series of high-profile bankruptcies in the United States, mostly in a retail sector hit hard by the health pandemic.

Neiman Marcus, J.C. Penney and J. Crew — all sub investment grade rated companies — have filed for bankruptcy, hoping to emerge as smaller organizations with far less debt. Whether they do emerge from insolvency is anyone’s guess, but it’s likely other struggling names in retail will join them in filing for bankruptcy soon and default on various loans.

But the default trend was getting worse before the latest spate of retail busts.

OAK BROOK, ILLINOIS - MAY 07: A sign hangs outside of a Neiman Marcus store that has been shuttered by the COVID-19 pandemic at Oak Brook Center shopping mall on May 07, 2020 in Oak Brook, Illinois. Neiman Marcus filed for bankruptcy today, making it the first major retailer to seek bankruptcy protection since the economic collapse brought on by the coronavirus pandemic. (Photo by Scott Olson/Getty Images)

April had the highest single month default rate (32 defaults) since the Great Recession, according to S&P’s research. The greatest number of defaults last month came from the U.S. (21), led by retail and restaurants, media and entertainment, and health care.

Meanwhile, total commercial Chapter 11 bankruptcy filings surged by 14% in the first quarter, according to the American Bankruptcy Institute. In March alone, commercial bankruptcies rose 18% year-over \-year.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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