To 27 May, eight companies, each with more than $500 million in liabilities, filed Chapter 11 bankruptcy this month, including five in one day. Last year, the monthly average was three filings, the Financial Times noted.
So far this year, 23 corporations with nine-figure debts have gone bust, compared to 40 for all of 2022, according to data service Bankruptcydata.com.
Years of dirt-cheap loans and rising stock values allowed companies with shaky finances to survive. Now markets have cooled and interest rates have shot from 0.25 percent to more than 5 percent, exposing those businesses’ weaknesses.
Corporate defaults roiled about 1 percent of companies in 2021; now the rate has climbed to 2.5 percent and will reach 4.5 percent early next year, S&P Global has predicted.
“We are going to see an increase in ‘hard restructurings,’ driven by the combination of higher debt levels from the borrowing binge of COVID and rising interest rates,” Bill Derrough, a Moelis investment banker, said to the FT.
Defaults will be triggered by “running out of money and the inability to refinance maturing debt,” he added.
In 2020 through 2022, several companies in which private equity firms had invested negotiated “liability management” deals that extended their debt repayment deadlines and allowed them to borrow even more.
Two such companies, Envision Healthcare and Serta Simmons Bedding, went bankrupt this year.
“Very few of these liability management transactions have been successful,” Mike Harmon, managing partner at Gaviota Investments, said to The Wall Street Journal.
TREND FORECAST: The new figures confirm our forecast from “Corporate Bankruptcies to Reach 13-Year High, Data Indicates” (23 May 2023): even if central banks halt their march of rate hikes—which the European Central Bank will not do yet—business bankruptcies will continue to grow in number.
Many companies borrowed to survive when interest rates were dirt cheap. Now as interest rates keep rising and their profit margins shrink, more businesses are finding it harder and/or too costly to borrow money.
In addition, banks are becoming more stringent in what they require of businesses they lend to.
Stir those ingredients together and you have heavily leveraged companies trying to pay their bills in a slumping economy presided over by skeptical lenders less likely to be interested in refinancing troubled debt.
The continued rise in bankruptcies will ripple through the economy and push the U.S. closer to recession.