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Bankruptcy filings by publicly-traded companies have surged so far this year, with 61 filings and a total of $86 billion in assets entering Chapter 11 or Chapter 7. For perspective, this is more than twice the $33 billion in assets at this point last year. If bankruptcy filings continue at the same pace during the second half of the year, the total assets going into bankruptcy in 2016 would be the fourth highest of all time, surpassed only by 2008 and 2001-02.
Energy-related companies dominated the filings, with ten of the fifteen largest bankruptcies coming from this capital-intensive industry. Similarly, over 80% of all $86 billion in assets entering bankruptcy were from energy-related companies.
In addition to a number of oil & gas companies going into Chapter 11, every large publicly-traded pure-play coal company has now filed for bankruptcy. Consol Energy, thanks to its substantial natural gas assets in addition to its coal assets, remains afloat.
The balance of 2016’s filings have come from a diverse mix of technology, airline, printing, metals, and other industries. [Insert chart of “Largest Bankruptcies of 2016”]. We expect this heavy bankruptcy volume from energy companies to continue, but it could be reaching its peak. Oil prices have recovered somewhat, and many of the weakest companies have already filed.
However, we expect to see bankruptcy activity increase away from the energy sector. The amount of high-yield debt raised during the 2009-2015 credit cycle has been huge – almost double the previous credit boom – and much of that debt matures over the next several years. While most companies should be able to refinance their debt, some of the weaker performers will not. Only a relatively small uptick in the default rate will create a significant number of new bankruptcies. Economic weakness, rising interest rates, or soft financial markets could boost the number of coming bankruptcies even higher.
We are starting to see some interesting investment opportunities arising from the current bankruptcies. However, most of them come from defaulted bonds, and it may be a while before we see an exciting new crop of post-bankruptcy stocks.