"The face amount of bonds that have not yet defaulted but are trading below 50 cents on the dollar jumped to about $80 billion in December, a more than five-fold increase during 2015 and the highest level since the 2008-09 financial crisis."
(PRWEB) January 14, 2016
BankruptcyData.com's analysis indicates that public* company bankruptcy filings increased by 46% in 2015—primarily driven by surging Energy sector filings. A total of 79 publicly traded companies filed for Chapter 7/Chapter 11 protection last year with $81 billion in combined pre-petition assets**.
The 2015 crop of publicly traded filings includes six with assets above $3 billion compared to only two the previous year. Similarly, there were 19 bankruptcies with assets over $1 billion in 2015 versus 11 a year ago. Eight of the ten largest Chapter 11's were initiated by companies in the Oil & Gas, Mining and related sectors—and a remarkable 51% of 2015's total public bankruptcies came from those industries.
Many Wall Street analysts, including George Putnam, Publisher of The Turnaround Letter and distressed securities investor, see a further increase in U.S. Bankruptcy Court activity. Putnam explains, "There could be a number of additional companies getting ready to file in 2016. The face amount of bonds that have not yet defaulted but are trading below 50 cents on the dollar jumped to about $80 billion in December, a more than five-fold increase during 2015 and the highest level since the 2008-09 financial crisis."
Putnam continues, "Some meaningful percentage of those issuers will not be able to refinance their debt and be forced to restructure when their debt matures, even if the high yield debt market strengthens again. If the junk bond market is weak for a while, the number of defaults and restructurings is likely to be even larger."
Although the Oil & Gas/Mining stampede to U.S. Bankruptcy Court did not kick off until early March, the sector's dominance continued to mount right up until the final moments of 2015—with Swift Energy's $2 billion New Year's Eve filing capping off the year. This upward trend and its direct relation to the decline in crude oil prices is discussed below. Not only was the volume of public company bankruptcies from this sector (40 of the total 79 filings) noteworthy, so too was the size of companies seeking U.S. Bankruptcy Court protection. Thirteen of 2015's Oil & Gas/Mining debtors listed pre-petition assets greater than $1 billion, and nine of those were over $2 billion.
The Oil & Gas/Mining bankruptcy rush gained speed after March 2015, pronouncedly spiking in 4Q15 as oil prices plummeted. Of course, many Oil & Gas/Mining sector companies did manage to limp through 2015, but none emerged unscathed. Looking to Wall Street, the Energy Select Sector Index was down more than 23%; and many of the smaller capitalization exploration & production and mining stocks were down a lot more than that. Similarly, the Energy industry was also the big spoiler in the high yield bond arena in 2015. Energy bonds, which had grown to be nearly 20% of the high yield index 18 months ago, were crushed—with many dropping down to 20 or 30 cents on the dollar or less.
Turning our focus to overall U.S. Bankruptcy Court trends, although public company filings rose dramatically, the broader business bankruptcy sector, in general, did not. Consistent with the past several years, the downward spiral of total business bankruptcies continued through 2015, with a 14% decline compared to 2014. 2015's filing totals reflect the sixth consecutive decline. Remarkably, the 2015 figure represents roughly 33% of the business bankruptcy activity docketed in 2009. It is interesting to note, however, that we have recently seen a marked reduction in this year-over-year decline: Between 2010 and 2014, business bankruptcies dropped an average of 22% year-over-year—versus the 14% seen between 2014 and 2015.
Looking back at 2015, BankruptcyData.com's research reveals a 14% decline in overall business bankruptcies but a 46% uptick in public company Chapter 11 filings—with a striking 51% of those filings coming from the battered Oil & Gas/Mining sectors. Looking forward, economic indicators point to further increases in corporate bankruptcy, in general, and Energy-related filings, in particular. Just a few days into 2016, this viewpoint has already been validated by Arch Coal's long-awaited $8 billion Chapter 11 filing—and continuing oil price plummets severe enough that OPEC's President, Emmanuel Kachikwu, has confirmed that an emergency meeting is likely necessary to address "shattered" economies.
For those in the distressed arena, this could result in contrarian investing opportunities. Commenting on these U.S. Bankruptcy Court trends and their Wall Street impact, Putnam sees the silver lining: "We believe that there will be many good investment opportunities among the current crop of distressed securities. If oil prices were to rebound from their current level of about $35 per barrel to $60 to $70 per barrel—still well shy of the June 2014 price of around $100 per barrel—many of the oil & gas bonds currently trading for pennies on the dollar would soar. Moreover, the near panic selling that we've seen in many corners of the high yield bond market in the last few months has a number of bonds in a variety of industries ripe for a significant rebound."
- BankruptcyData.com defines publicly traded as those companies with common stock and/or bonds that are publicly traded on U.S. markets.
** Total asset figures are pre-petition and taken from each debtor's most recent Annual Report filed with the Securities and Exchange Commission.