A Window into The Future

March 28, 2020

A constant theme of my missives is that we are likely to experience a debt crisis.  Over the past few months there have been a number of high profile bankruptcies, but the evidence is increasing over the past few weeks.

The action by the central banks of the world are helping to subdue the damage.  There are serious concerns that it won’t be enough.

On Friday satellite operator OneWeb declared bankruptcy.   This was a pet project of SoftBank, an investor who has made a name for itself by supporting businesses with deep pockets.   Over the past few months, their investment in WeWork has collapsed, and now cash seems to be tight.

This isn’t the only example.   Some other names that may not be so well known are lining up to ‘re-organize’, ‘re-structure’ or cease operations.   Here are a few in no particular order:

• Papyrus – January, 2020
• Fairway Market – January 22, 2020
• Lucky’s Market – Filed January 27th ($600MM in liabilities)
• Art Van Furniture – Filed March 9th ($100MM to $500MM in liabilities)
• Modell`s Sporting Goods – Filed March 11th
• Neiman Marcus – mulling a bankruptcy filing
• Chesapeake Energy – Not yet bankrupt
• California Resources – Not yet bankrupt

This follows some high profile bankruptcies last fall.

• Barney`s New York – August, 2019 ($100MM to $500MM in liabilities) bought by Authentic Brands for $271MM in November.
• Forever 21 – September 29, 2019 – Exiting in early March, having sold assets for $81MM after over $1 Billion of loses wiped out

In any given year thousands of companies go bankrupt, but many of them are small enterprises.  Companies that have little opportunity to encourage new investment.   The risk currently is that thousands of large enterprises will face the same pressure.

With banks having to deliver capital to large companies to keep them afloat, they won’t have the attention or the capital to support smaller companies who will also need capital.  Those that are on the ‘edge’ of viability will fall off at a rapid clip and as the names above demonstrate, you can’t tell how close to the edge a company is based on it’s brand or popularity.   Only a good look at a balance sheet, operating costs and revenues can give a meaningful estimate of worth.

There is a great deal of economic pain coming for businesses as demand collapses.  While the length of this decline matters a great deal, it will dramatically alter the revenue expectations for many businesses for a long time.  More importantly the loans being offered to assist will saddle some companies with additional debt that may itself be unsustainable.

The difficulties are hard to measure without an understanding of what ‘new normal’ will look like, but the immediate future looks dramatically different than the recent past.