The Halftime Report: High Scoring First Half Suggests More Second-Half Action

Whew! We need a quick breather following a memorable first half for restructuring activity, punctuated in the second quarter by a pile-on of bankruptcy filings and debt defaults that was nearly unrivaled in the record books.

How wild was the second-quarter action? It was easily the strongest quarter for restructuring activity in over a decade. Comparisons to 2009 are appropriate (Exhibit 1). However, we’ll need to see at least several more months of elevated filings and defaults before that comparison becomes a serious discussion.

Let’s acknowledge that nobody foresaw an economic downturn arriving the way it did, via a global pandemic that shut down much of the national economy for several weeks. In early 2020, even the most ardent bears were expecting restructuring activity to merely grind higher, as it had for many months prior to the outbreak of COVID-19. Those predicting a recession weren’t expecting a shock event of this magnitude to trigger the downturn.

The wave of debt defaults and large bankruptcies that has ensued since the arrival of COVID-19 is attributable not only to the business interruption resulting from the shutdown, but the financial vulnerability of many large companies whose aggressive capital structures could not withstand deviations from plan, even for a few months.

Now let’s take a look at those halftime stats¹:

• There were 114 large (>$50 million) Chapter 11 filings in1H20 vs. 74 in 1H19, an increase of 54%.
• Most of the action came in the second quarter: There were 69 large (>$50 million) Chapter 11 filings in 2Q20 vs. 37 in 2Q19, an increase of 86%.

Footnotes:

¹: All Chapter 11 statistics cited sourced from The Deal; all debt defaults statistics taken from S&P Ratings Direct.

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