While mass corporate bankruptcies are a dismal sign for the US economy, leading to sharp declines in living standards as formerly zombie companies finally succumb to their fate letting millions of people go in the process, they are also a cause of celebration for financial and legal bankruptcy advisors such as Greenhill, Houlihan Lokey and Lazard. So when one of these firms warns that it is about to make a killing, it's time listen.
Speaking in an interview with Bloomberg TV, the politically-connected chief executive of the financial-advisory business. Lazard's, Peter Orzsag, said that firms hammered by Covid-19 could start to bring down a much wider array of companies unless more funds are injected into the economy.
"If unemployment remains elevated for an extended period of time, and especially if there is not additional rounds of government stimulus, we’re at some significant risk of cascading bankruptcies," Orszag told Bloomberg TV. "A bankruptcy at one firm then infects another firm, and then that infects a third firm."
This is similar to what Matt King pointed out last week in his latest presentation, showing how just as the coronavirus spreads exponentially, so do corporate bankruptcies, where without rescue funding, as many as 60% of all SMEs can run out of cash after a 12 week shutdown.
Meanwhile, back in the real world, Congress is currently seeking an additional round of stimulus after almost $3 trillion has been earmarked for companies and individuals stung by the shutdowns tied to the Covid-19 pandemic. Yet even companies that have sought payroll assistance, such as airlines, may have to cut jobs as demand for services is slow to return.
Bankruptcies have already spiked, with Goldman forecasting the 12-month trailing default rate will increase to 13% over the course of 2020 before starting to decline as the economy normalizes in 2021.
As a result, Lazard has been busy working on several high-profile restructuring deals including that of retailers J.C. Penney and Forever 21. Orszag expects there will be additional rounds of intermittent shutdowns that will further complicate a recovery.
"This is not going to be one and done, and boom we’re out of the woods," he said. “I don’t think we’re going to flip a switch and everything turns back on," although judging by how the market is trading that precisely what stocks think will happen.
Ironically Orszag, who was the director of the Office of Management and Budget during former President Barack Obama’s administration, appears less interested in collecting advisory revenue from bankrupt clients, and said that he believes state and local aid should be at the forefront of the next wave of government aid, a popular Democratic talking point. That’s been a point of contention in Congress, though House Speaker Nancy Pelosi has hinted of at least a partial agreement with Mitch McConnell on that part of the rescue.
The Lazard banker expects public criticism to build in coming months over who gets access to funding. Jim Millstein of Guggenheim Securities, a Lazard rival in the restructuring business, said yesterday that the investor class had been a major beneficiary of the Federal Reserve’s moves to backstop the credit markets, surprising exactly nobody.
Separately, Orszag estimated that the Fed will own as much as 15% of corporate debt as it continues to buy bonds, and predicted that government intervention will be prolonged, forcing companies to consider stakeholders other than their investors.
"The backlash is going to be building,” Orszag said. “It’s going to be reaching its peak right when we probably are going to need an additional round of government assistance."
Watch the full interview below: