Pandemic Drives Auto Bankruptcies Higher

Coronavirus-driven reduction in demand, and operational and supply chain disruptions, have resulted in a material uptick in bankruptcies and distress in the U.S. automotive industry, according to a new Fitch Ratings report.

“Over the long term, original equipment manufacturers and suppliers that are unable to effectively compete in the changing technological landscape are expected to be the most exposed to potential credit profile deterioration,” said Judah Gross, Director.

The 5.0x median enterprise value exit multiple for automotive bankruptcy cases was relatively low compared with the 6.1x corporate reorganization multiple in Fitch’s broad, cross-sector U.S. bankruptcy case database. The median reflects the deep distress in the auto sector during the recession period, combined with the uncertain timing and speed of recovery at the point when many reorganization enterprise valuations in the sector were completed.

The average ultimate recovery rate for first-lien debt issues was 73%. Fifty-seven percent of the issues received recoveries in the 91-100 percent range despite an adverse operating and market environment at the time of many of the reorganization valuations. Junior debt claims sustained large losses.

The median debt reduction percentage in bankruptcy was approximately 70.5%.  The U.S. high-yield bond default rate for the auto sector averaged 6.9% from 2001 to 2020, compared with 4% for the overall market.

Source: Fitch Ratings