Bond Defaults Deliver 99% Losses in New Era of U.S. Bankruptcies
Market prices, derivative auctions imply debt may be worthless
High borrowings, weak protections leading to low recoveries
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Three cents. Two cents. Even a mere 0.125 cents on the dollar.
More and more, these are the kinds of scraps that bondholders are fighting over as companies go belly up.
Bankruptcy filings are surging due to the economic fallout of Covid-19, and many lenders are coming to the realization that their claims are almost completely worthless. Instead of recouping, say, 40 cents for every dollar owed, as has been the norm for years, unsecured creditors now face the unenviable prospect of walking away with just pennies -- if that.
While few could have foreseen the pandemic’s toll on the economy, the depth of investors’ pain from corporate distress was all too predictable. Desperate to generate higher returns during a decade of rock-bottom interest rates, money managers bargained away legal protections, accepted ever-widening loopholes, and turned a blind eye to questionable earnings projections. Corporations, for their part, took full advantage and gorged on astronomical amounts of debt that many now cannot repay or refinance.