The Coronavirus Crisis Could Wipe Out Entire Industries. These 5 Are at Risk
Without a federal bailout, some businesses and maybe entire industries have the potential to disappear due to the coronavirus pandemic. This is not only because half of humankind is now under stay-at-home orders, warned against going out to shop, work, play and spend money on anything but the most essential things.
It’s also because a long period of low-interest rates encouraged companies to add debt, much of which will soon come due, Barrons reported.
Corporate debt hit 47 percent of gross domestic product in 2020, higher than the 45 percent it hit before the 2008 recession. More than half of investment-grade debt was rated BBB last year — almost junk — and about 30 percent of that was vulnerable to a downgrade before the coronavirus outbreak.
“The country is about to be awash in junk debt, and companies in industries from airlines to energy will face a reckoning that could force them to merge or go out of business entirely,” Avi Salzman wrote for Barrons.
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By the end of the year, the default rate on high-yield bonds is expected to rise as high as 10 percent from 2.9 percent last year, said Edward Altman, professor emeritus of finance at New York University Stern School of Business. “The number of zombie companies likely to fail within 12 months has probably doubled since the start of the year,” he said.
Here are some industries, debt-ridden or otherwise, that are at risk of wipeout from the coronavirus.
Commercial real estate
WeWork failed in 2019 to pull off an initial public offering, due in part to investors who thought the company would not survive an economic downturn. With the economy now in a recession or depression, that theory is being tested as millions of workers are told to work remotely from home.
Working remotely has introduced new customers to technology made by Slack, Zoom, Atlassian, Citrix and others that have spent the past decade enabling people to take their offices with them, CNBC reported. “For companies that have resisted work-from-home efforts, a seamless stretch of months away from the office could change minds and establish work-from-home policies as standard for nearly all jobs,” Alex Sherman wrote for CNBC.
The commercial mortgage-backed securities market has essentially collapsed and the broader $20 trillion commercial real estate market is on the verge of collapse as well, according to Greg Kraut, co-founder and CEO of New York-based KPG Funds. “We still have time to prevent this catastrophic event, but we need government intervention now,” Kraut wrote on April 2 in a column for the Commerical Observer.
Calls have gone out for a commercial rent and debt service moratorium, Crain’s reported.
Private equity
Private equity firms are freaking out, worried that companies they own are mostly cut off from the $377 billion in small business loans and grants covered by the $2 trillion U.S. coronavirus relief bill.
In the past decade, the private sector encouraged portfolio companies to tap the loan market rather than issue high-yield bonds, which were largely closed off to businesses their size, Washington Post reported. Today, about half of leveraged loans — $1.5 trillion worth — are issued by sponsors for private equity holdings.
Private-equity firms own everything from fast-food restaurants and hotels to hospitals and dental offices. Their investments are financed using debt, sometimes as much as 70 percent, according to Barrons.
Private equity is an alternative form of private financing, away from public markets, in which funds and investors directly invest in companies or engage in buyouts of such companies. Private equity firms make money by charging management and performance fees from investors in a fund.
Bankruptcy could face private-equity firms if the coronavirus crisis lasts 18 months, said Bill Ackman, head of hedge fund firm Pershing Square Capital Management.
Energy and sustainable energy
The wind industry was on track for a record year of installations in the U.S., the world’s second-largest renewables market after China. Now it’s threatened by COVID-19. U.S. renewable energy tax credits for wind and solar make developers reliant on a relatively limited number of investors willing to provide tax equity for projects, Greentech Media reported.
A few weeks ago, the biggest COVID-19 concern for renewable energy seemed to be the supply of equipment, given the pandemic’s early impact in China. Would there be enough solar panels, wind turbines and batteries to meet demand and project deadlines, given the widespread factory shutdowns?
Now the focus is shifting to demand in the face of an inevitable global economic slowdown.
Oil companies may be the most at risk of going under in this crisis, Barrons reported. They face not just declining demand as half the world shelters in place, but also a global supply war involving Russia and Saudi Arabia that could keep prices down for more than a year.
Energy makes up the largest portion of the high-yield debt market. Producers have taken on $120 billion in debt in the past five years, and much of it comes due in the next two.
“It’s pretty well known that when oil prices are below $40 a barrel, there’s going to be an increase in defaults,” NYU’s Altman said. “Now they’re below $30, so it’s pretty given that the industry’s going to suffer big time.”
Airlines
This is the worst it’s ever been for the airlines, even after 9/11, Bloomberg reported. It will be survival of the fittest. Most will go bankrupt by the end of May if they can’t get a bailout, Sydney-based CAPA Centre for Aviation said.
U.S. airlines have cut international capacity by as much as 80-to-90 percent for April and May, but are required to keep flying “ghost planes” under the terms of the U.S. CARES Act coronavirus federal stimulus package.
Provisions of the bailout package for airlines include payroll grants to keep employee paychecks stable and loans to help offset negative cash flow.
About $58 billion is allocated to help airlines stay open. That includes $25 billion for passenger air carriers, up to $4 billion for cargo air carriers, and up to $3 billion for airline contractors.
“There’s a better option than a taxpayer bailout for airlines,” columnist Catherine Rampell wrote for the Washington Post. “It’s bankruptcy.”
Movie theaters and fitness centers
Movie theaters have been closed around the country an initial market reaction looks horrible, CNBC reported. Cinemark was trading down nearly 40 percent on Monday. AMC Entertainment was down about 20 percent, and its market capitalization was below $300 million.
Movie theaters won’t disappear completely, LightShed analyst Rich Greenfield said Monday in a note to clients. Pay-per-view wouldn’t come close to making up for box office ticket sales, he said as he explained the math for how much a studio makes releasing a movie in theaters globally versus how much it would have to charge per household on-demand.
“Between the quality of TV content improving, streaming services like Netflix introducing original movies, and then add in theaters closing for months, which may lead some to go out of business or go bankrupt, and it’s hard to believe theater attendance is going to come back to what it was,” Greenfield said.
The longer consumers live without gyms and other location-based businesses (spas, salons) the harder those businesses may have to work to win consumers back, said Gregory Milano, CEO of Fortuna Advisors, a strategy consulting firm that specializes in capital allocation and behavioral finance.
Peloton built a $6 billion enterprise by taking on gyms with Internet-connected home fitness classes on its bikes and treadmills. Its shares rose more than 12 percent on Monday — the same percentage the S&P 500 lost — as investors bought into home fitness classes.