Before the coronavirus pandemic knocked the world down to its knees, global business insolvencies were already expected to rise in 2020 for the fourth consecutive year. Then the sudden shock of historic proportions caused by COVID-19 hit the global economy, which will have a lasting and far-reaching effect on bankruptcies and insolvencies for a long time to come.
The COVID-19 pandemic has apparently spared no one in its economic devastation around the globe. From entertainment titans to iconic century-old department stores, whole industries are seeing profits disappear virtually overnight, which isn’t leaving enough cash flow for them to cover debt payments they owe to creditors.
The calm before the storm
While some economies are thankfully beginning to emerge from these lockdowns, the Coronavirus is creating an insolvency time bomb and the perfect storm for a massive wave of bankruptcies in the weeks, months, even years ahead, as the bulk of bankruptcies are still yet to happen.
Falling demand, stay-at-home quarantine orders, and the forced closure of certain businesses have combined to really take their toll on many industries. None more prominent than the retail industry, which has already been struggling over the past several years as consumers continued their pivot towards shopping online. And even as these economies slowly reopen, social distancing measures combined with reduced spending thanks to job insecurities are also having a negative impact and creating more long-term issues for many businesses.
Some companies that have already been impacted
While some businesses were able to pivot to deliveries and online sales during the COVID-19 shutdowns, the most heavily impacted industries like retail shops, fitness stores, restaurants, and airlines reported drastic reductions in revenue as they depend on foot traffic from workers, travelers, and last-minute shoppers to survive. The transportation sector also has an extremely bleak outlook, with Aeromexico, Virgin, Jetstar, and many other airlines faced with an increasing amount of challenges and a higher probability of default.
Several of these businesses have already filed for bankruptcy since the pandemic first started smashing the economy in March, such as J. Crew, CMX Cinemas, Gold’s Gym, and Neiman Marcus. Any company that was already dealing with declining or weak financial health going into this pandemic will ultimately be faced with the highest risk of insolvency or bankruptcy.
One of America’s oldest department stores, JCPenney recently had to file for bankruptcy earlier this year after being in business for almost 120 years. While JCPenney was already facing financial trouble for a number of years as shoppers turned to online retailers, it was this pandemic that forced the final nail in their coffin, forcing them to announce their first phase of store closures.
World-famous and iconic Canadian entertainment and acrobatics group, Cirque du Soleil, also filed for bankruptcy in the middle of the year, announcing layoffs for over 3000 employees who were already furloughed. Their press release also stated that this financial restructuring was in direct response to the economic downturn caused by closures and cancellations due to the pandemic.
A surge in bankruptcies could be inevitable
Bankruptcy experts agree that it’s really not a question of if, but when the coronavirus pandemic causes a surge in bankruptcies. That being said, bankruptcy doesn’t necessarily mean that all of these companies will inevitably go out of business. In fact, it can sometimes be the one thing most responsible for saving a business, but it does spell bad news regarding the changes to come, assuming of course that the courts will be able to handle the flood of them that is likely to be ahead.
Despite the efforts of governments offering emergency stimulus packages and debt holidays for individuals and businesses alike, we’re likely only seeing the very tip of the iceberg when it comes to business bankruptcies. The rates of default and insolvency are only going to increase, so there’ll be a large number of companies that will not survive to see the end of 2020.