My first memory of Hertz was as a kid back in 1977, when the famous O.J. Simpson commercials were a big hit. Of course, that was before all of the controversy that eventually tarnished O.J. for the rest of his life. The big news in the business world Friday night was the bankruptcy announcement by Hertz, that iconic rental car company that began renting cars in 1918.
Get ready to hear of more and more bankruptcies in the coming weeks and months. The unprecedented shutdown of the global economy in response to the COVID-19 pandemic has been devastating to many industries, beginning with industries related to travel, such as airlines, hotels, resorts, and yes, car rentals. These were the first industries to be impacted as airline travel began to decline, starting with the restriction on airline travel between China and the U.S. on January 31.
Since then, more and more industries have been impacted with the restrictions on businesses, stay-at-home orders, and enhanced social distancing. Many types of retail stores were not allowed to stay open, or their operations were severely limited to online sales or, in some instances, curbside pick-up. Restaurants were similarly impacted, especially those without drive-through windows or strong delivery models like pizza shops. Automobile sales declined. As a significant majority of people stayed at home and limited travel, fuel consumption evaporated, impacting industries from oil drilling to the local convenience store. These industries were also hit by the oil price war between Russia and Saudi Arabia that started during the weekend of March 7-8, just before the shutdowns hit North America.
The early forecasts of a “V-shaped” recovery, where the economy would quickly return to normal, were frankly laughable. As I start week number 11 of working from home (and 3 months without a haircut!), we have brought significant portions of our economy to a stand-still for over two months. Only now are we starting to see partial openings in some parts of the U.S. Here in Canada, it appears the reopening process is going to be a bit slower than in the U.S. And with the opening, how many of us will be willing to go to crowded places immediately? How long until this fear subsides? How restrictive will the regulations on businesses like restaurants be? Can restaurants survive if they can only seat 25% of their previous capacity? I am not sure there are a lot that can survive on less than 90% of previous capacity, with the low margins typical in these businesses? What happens if we get a second wave of infections in the next few months? Will the economy get shut down again?
There are a lot of unknowns that we now face. And I see no way that we will avoid a tidal wave of bankruptcies as we go forward. Businesses cannot survive very long without revenues, especially when there are fixed expenses that still need to be paid. Sure, businesses can furlough employees until this is over, but they cannot stop paying rent without being in default of their lease. Or, if they own their own property, most will have mortgage payment obligations to the lender.
One thing you may find a bit difficult to reconcile is the U.S. has already passed $2.8 trillion in aid to businesses and individuals under the various CARES act proposals, with likely more to come. Why can’t these bailouts keep companies from filing for bankruptcy?. Not Hertz. Not Neiman Marcus. Not JC Penny or J. Crew. While $2.8 trillion is A LOT of money, the truth is that this amount is only a band-aid for a couple of months in an economy the size of the U.S. And I hate to be the bearer of bad news, but there is a limit to how much the U.S. government, via the Treasury Department, can spend to continue to bail out businesses (apologies to all MMT believers).
A great resource if you want to understand the companies with the highest risk for bankruptcy is the Credit Risk Monitor (www.creditriskmonitor.com). They publish Frisk scores for more than 56,000 companies worldwide. The Frisk score is a 1 to 10 rating of credit risk, with 10 being the least risk and 1 being the highest risk. Any rating fro 1 to 5 is considered to be high risk. In the May 13 blog post on their website, they reported that bankruptcies through the first four months of the year were up 25%, from 47 last year to 59 this year. However, more alarming was the 69% increase in April, from 13 to 22. The blog post described the current environment as follows (emphasis theirs):
“The global spread of COVID-19 in 2020 has resulted in massive economic upheavals. Countries across the globe have enforced social distancing mandates and closed non-essential businesses, as the first quarter was closing. The economic hit from those decisions started to be felt fully by companies in April, as demand for virtually everything not related to the fight against the coronavirus plummeted. With the historic increase in corporate debt taken on in recent years, CreditRiskMonitor believes this is only [the] start of the default and bankruptcy trends. Based on previous recessions, we expect $1.2+ trillion in losses to be experienced in the U.S. market before this correction is complete.”
Well said. I hate being pessimistic, but to me, everything points to a difficult economic environment for the foreseeable future.
As I ponder the topics of future posts, I do have a few topics in mind, including the following:
- A recession was already coming, COVID-19 just pushed things along
- Fed mismanagement in the past two decades has put us in this situation
- Welcome to the Fourth Turning
Have a great, and safe, week!
Brent
Seay Economics 
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