One of the silver linings of the coronacrisis to date is that despite the unprecedented collapse in the broader economy and the 30 or so million unemployed, the pace of bankruptcy filings has been relatively steady compared to the pre-covid levels, as the following Goldman chart shows.
Unfortunately the relative calm is not meant to last, because as we observed last month, Moody's recently expanded its "B3 Negative and lower list" which soared to its highest tally ever — 311 companies. That tops a former peak of 291 companies, reached during the credit crisis of 2009 and the commodity-related downturn in April 2016. At 20.7% of the total rated spec-grade population, the list also shot up above its long-term average of 14.8%, and closing in on its all-time high of 26.1%. This spike is the result of the confluence of a coronavirus outbreak, plunging oil prices, and mounting recessionary conditions, which created severe and extensive credit shocks across many sectors, regions and markets, the effects of which are unprecedented.
And it's not just junk: a record number of investment grade names have been...
... or are about to be cut to junk, unleashing the long-awaited flood of fallen angels:
Of course, downgrades first to junk and then to deep junk are just the first step in a painful voyage which ends with bankruptcy.
And while many borrowers are actively pulling levers to preserve cash by cutting payrolls, capex, and dividends, in some cases even these drastic actions are not enough to avoid failures. Indeed, as the latest default tracker from Bank of America shows, there has already been a surge in recently defaulted names and deeply distressed names, with April defaults surging to $17bn while another $27bn in issuers now on the bank's default watchlist - issuers that are currently in grace period for missed payment, recently initiated distress exchanges, or other actions that could lead to potential default - and finally an additional $25bn in deep distress, whose bonds are currently trading below 50 cents on the dollar and have experienced price plunge by 50% from their maximum price within last 6 months.
Finally, if the following charts from Deutsche Bank's Torsten Slok is any indication, the wave of Chapter 11 bankruptcies...
... and loan delinquencies...
... that is about to flood the US will be nothing short of biblical.
And none other than the CEO of the world's biggest asset manager confirmed as much: speaking on a call with clients, Larry Fink who runs the $7.5 trillion Blackrock, said that bankers told him they "expect a cascade of bankruptcies to hit the American economy."