2021 Turning Points: The Biggest Bankruptcies Thus Far

After record-breaking public company bankruptcies in 2020, major profile bankruptcy filings continue to roll in. Notable bankruptcies have come from the usual suspect industries, such as oil & gas and retail. Below are five of the largest and most important bankruptcies from the first half of 2021. In addition, we will take a look at five additional risky companies that should be monitored closely as we enter the summer season.

First Half Failures

Even during this post-pandemic recovery, many companies are still financially distressed. This is why, as a risk professional, you can never let your guard down. Each of these companies carried high leverage and had weak operating performance, pushing them to seek out court protections.

The FRISK® score and the DBT Index are based on "1" (worst possible)-to-"10" (best possible) scales. A FRISK® score of "5" or below is in the high-risk "red zone," with a score of "1" indicating a 10-to-50x higher risk of future bankruptcy compared to the average company. A high DBT Index, which is similar to Dun & Bradstreet's PAYDEX® score, indicates past promptness in payment behavior.

It's worth noting that there are two retail names on the list above and three that are tied to the energy sector:

• Valaris plc and Seadrill LTD suffered from weak offshore contract pricing, 
• HighPoint Resources struggled to balance production and sustain cash flow break evens, 
• Steinhoff International Holdings NV was involved in an accounting scandal, and 
• Christopher & Banks Corporation store chains were negatively impacted by the pandemic and its bankruptcy filing was later converted to a Chapter 7 liquidation

Christopher & Banks Corporation had posted four consecutive quarters of losses and had to draw down on its credit and term loan facilities as well as a PPP loan to sustain working capital before filing in January 2021. The lowest-possible FRISK® score of "1" provided an early warning of what was to come, despite continued timely payment of its bills. The retailer's decline into bankruptcy is emblematic of the story that has been unfolding in the retail space for some time – retailers need to have a strong omnichannel presence, inventory management, and flexibility to address changing customer demands. 

HighPoint Resources attempted to control its SG&A costs while substantially reducing its project capital expenditures to achieve cash flow breakeven throughout 2020. However, low oil and natural gas prices decimated its profitability, resulting in impairment charges totaling $1.33 billion, which encompassed nearly all of the company’s outstanding tangible equity. The FRISK® score provided subscribers with an early indication of this looming bankruptcy risk, whereas Highpoint’s debt-funded, prompt payment of its vendors sustained a high DBT Index throughout the decline. Energy prices have stabilized and are likely to help many struggling energy operators muddle through in the near term, but staying aware of FRISK® score “red zone” operators is absolutely critical.

Looking Forward

CreditRiskMonitor has identified a variety of high-risk companies in distinct industries including Personal & Household Products, Aerospace & Defense, Electronic Instruments & Controls, and Trucking. The list below highlights five companies that are still struggling, as indicated by their red zone FRISK® scores:

This list shows that high-risk operators are still widely apparent across a variety of industries. Furthermore, these high-risk companies are still paying on time, despite having bottom-of-the-barrel FRISK® scores, a condition commonly known as the Cloaking Effect. Such timely payments are made to ensure that the company maintains access to trade credit, a massive, interest-free source of financing. The trade credit market is roughly three times the size of bank loans and approximately 25% of corporate debt in the United States. Losing access to this source of financing has immense negative impacts on the working capital of corporations. 

SGL Carbon SE stands out because it is the only company with a FRISK® score of "2." A score of "2," corresponds to a bankruptcy risk that is as high as 10% over the coming year. The company has lost money in three of the past five quarters, its bonds are junk-rated, and its debt-to-assets ratio is in the bottom quartile of its peer group. This financially troubled name also replaced its CEO and CFO in August 2020; key personnel changes are a troubling sign for financially struggling companies. Although the FRISK® score has risen from a worst possible "1" at the time of the management shift, there are still plenty of reasons to keep a close watch. 

Yellow Corporation fits directly into supply chain logjams, specifically related to products being transported from ports to their end destinations. The trucking company’s top line has held up reasonably well over the past year or so, but its financial leverage has materially increased due to its, now under Congressional investigation, $700 million CARES Act relief loan from U.S. Treasury in July 2020. Factor in its looming step-up EBITDA covenants and Yellow Corp. should continue to be carefully monitored. 

Bottom Line

Don’t let your focus wane. Even during a post-pandemic recovery, numerous financially troubled companies need to be monitored carefully. Bankruptcies in the first half of 2021 highlighted some of the major 2020 industry risk themes, and now new risk trends are coming into play. Contact CreditRiskMonitor today to see how we can help you pinpoint the risks in your portfolio that need the closest attention.