By Miriam Gottfried 

The tidal wave of corporate failures that in April seemed poised to come crashing down has yet to materialize, and some on Wall Street are starting to wonder if it ever will.

The coronavirus crisis has dealt an unquestionable blow to U.S. companies. Stay-at-home orders and the rout in oil markets have led to a significant uptick in defaults and bankruptcy filings, from retailers such as J.C. Penney & Co. and Neiman Marcus Group Inc. to car-rental company Hertz Global Holdings Inc. and a long list of energy outfits.

For the most part, however, the companies that have succumbed were already heavily indebted and in industries that were declining before the pandemic. The loss of revenue during the economic shutdown tipped them over the edge.

The picture for healthier companies, on the other hand, has brightened considerably over the past couple of months, thanks in large part to the Federal Reserve's corporate-bond-buying program, which includes the debt of investment-grade companies as well as those that had investment-grade credit ratings before March 22.

The central bank's unprecedented actions allowed companies including Boeing Co., General Motors Co. and Royal Caribbean Cruises Ltd., all hard-hit by the pandemic, to raise significant amounts of capital and stave off possible default -- at least for now.

Investor appetite for yield amid record-low interest rates also has helped spur a swift recovery in the market for riskier debt. Companies such as AMC Entertainment Holdings Inc. and SeaWorld Entertainment Inc. raised billions of dollars through high-yield bond offerings in April.

Meanwhile, there has been an upswing in sentiment over the pace of the economic recovery. Better-than-expected employment, retail and new-home sales data in May helped fuel a stock-market rally that has pushed major indexes back toward prepandemic levels. While those gains have been tempered by recent surges of coronavirus cases in some states, there is a widespread view that state and local governments lack the political will to reimpose the kinds of broad shutdowns that brought economic activity to a virtual standstill in March and April.

Companies in some of the most battered industries, including retailers Macy's Inc. and Kohl's Corp., as well as McDonald's Corp. and other drive-through restaurant chains, airlines and travel companies such as home-sharing firm Airbnb Inc. have reported a return of demand that has topped previously dire predictions. Even some energy investors and executives are beginning to see a future with oil prices rising beyond the $40-a-barrel range, restructuring advisers who work in the sector say.

The default rate among U.S. speculative-grade borrowers -- a measure of distress that is widely tracked among debt investors -- rose to 4.7% over the 12-month period ended May 31 from 2.3% in the year-ago period, according to S&P Global Ratings. But that is still a far cry from the November 2009 postcrisis peak of 12.1%.

"The Fed has done an exceptionally good job of flooding the market with liquidity," said Dwight Scott, head of Blackstone Group Inc.'s $121 billion credit business, GSO Capital Partners. "It's hard to argue with the idea that many of the companies that needed liquidity have received it."

He said GSO's financial projections have improved for about 80% of the borrowers in its portfolio since late March.

Blackstone had a couple of vehicles ready to take advantage of market panic stemming from the coronavirus outbreak, but unlike during the financial crisis, the window for such investments shut quickly, Executive Vice Chairman Hamilton "Tony" James told a California pension fund last week.

"There were bargains out there only for two weeks," he said.

Though the feared wave of distress, default and bankruptcy has so far remained at bay, there is no guarantee one won't eventually take shape.

The new debt companies are taking on could come back to bite them if their businesses don't recover quickly enough or fail to regain prepandemic levels. And a broad swath of midsize companies -- many of them private-equity backed and highly indebted -- lack access to public debt markets and remain at risk of falling victim to the slowdown.

S&P still estimates the default rate for speculative-grade U.S. companies will reach 12.5% in the 12-month period ending March 2021, topping the 2009 peak. The total base of U.S. speculative-grade debt has swelled to almost $3 trillion from just over $2 trillion in 2009, so even a smaller percentage could mean more defaults in dollar terms.

But the ratings agency acknowledges the potential for a range of outcomes due to the unprecedented and unpredictable nature of the crisis. In the most optimistic scenario, the default rate would reach only 6% by next March, while S&P's downside case is for a 15.5% rate.

There are reasons to believe such a pessimistic scenario may not come to pass.

Even illiquid midsize businesses may be able to kick the can down the road long enough to survive until their businesses recover, restructuring advisers say. Most companies whose loans come with lender protections known as covenants already have received waivers for the second and third quarters. Private-equity firms also have a boatload of unspent cash that they could use to keep portfolio companies afloat.

Additionally, many private-equity-backed deals were financed with "covenant-lite" loans, giving borrowers more breathing room. Among other things, such loans have allowed companies' owners to move assets beyond the reach of creditors, a maneuver being attempted with increasing frequency.

That has left distressed-debt investors -- who are trying to raise $51.6 billion in fresh funds to invest in North America, compared with $19.5 billion raised last year, according to Preqin -- waiting for another chance to pounce after a wild few weeks in March and early April.

"The greatest bargains that we get are when we buy things that nobody else will buy at a time when there's no money around," Howard Marks, co-founder of distressed-investment giant Oaktree Capital Group LLC, said in an interview with The Wall Street Journal at a virtual conference in June. "That's not a very good description of today."

--Preeti Singh contributed to this article.

Write to Miriam Gottfried at


(END) Dow Jones Newswires

June 30, 2020 05:44 ET (09:44 GMT)

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