Bankruptcy blitz highlights the end of the easy-money era

When Vice Media filed for bankruptcy this week, it was one of seven large Chapter 11 bankruptcies in a two-day span that started on Sunday.

Why it matters: That’s a lot — and more are likely on the way. Vice’s bankruptcy documents tell the story in painstaking detail of what happens when the easy-money era comes to an end.

The big picture: That era ended just over a year ago when the Federal Reserve embarked on one of the steepest and fastest rate-hiking campaigns in history — and it takes about that long for the consequences to really start trickling through the market.

• One of the most visible effects is bankruptcy: more filings, and bigger.

State of play: The blitz that started off the week is a “highly unusual” pace of filings, as Petition, a must-read bankruptcy newsletter, noted.

• If the pace in the second half of this month matches the first half, May will clock the highest monthly tally of large corporate bankruptcies so far this year, figures from bankruptcydata.com show. (Large filings are defined as those with liabilities of $10 million or more.)
• And don’t forget: Filings in Q1 had already jumped to their highest point since the bout of distress at the start of the pandemic.

Zoom out: Though Vice faced challenges specific to digital media, its “first day declaration” by chief restructuring officer Frank A. Pometti is all about that sweet, sweet access to capital.

• “VICE relied on external funding, raising both debt and equity capital to fuel its rapid growth,” Pometti says, in one instance of an oft-repeated remark. “VICE has been cash flow negative for the past several years.”
• Ultimately, “business challenges” combined with the “rapid deterioration of the debt and equity capital markets severely constrained VICE’s access to new capital,” Pometti says.

Vice isn’t unique: Look at KKR-owned Envision Healthcare, which filed on Sunday under a nearly $8 billion mountain of debt — or Bed Bath & Beyond, which succumbed to bankruptcy last month.

• Both were distressed even before the pandemic, but the capital markets helped them kick the can down the road for years — until they didn’t.

Worth noting: This isn’t necessarily evidence of a widespread “credit crunch.” The bond market, for instance, remains open for business, especially for companies with earnings and reasonable credit metrics.

• But the first thing that happens when the ultra-easy access to funding dries up is the spigot stops for the companies that maybe shouldn’t be borrowing more anyway.
• The most vulnerable — namely, those that have too much debt — suddenly have a harder time convincing investors to keep funding their losses.

What we’re watching: A bankruptcy blitz that’s sure to continue.

• S&P Global forecasts that the U.S. default rate will rise to 4.25% by the beginning of next year — from 2.5% currently — or, to 6.5% if there’s a serious recession.