Drowning Businessman In Insolvency And Bankruptcy Concept

Through April, at least 230 U.S. corporations have filed bankruptcy this year, more than any year’s first third since 2010, The New York Times found.

The data counts public companies with $2 million or more in assets or liabilities and private companies with at least $10 million in publicly traded debt.

The data does not include more recent high-profile crashes such as Vice Media, oil company Cox Operating, or Envision Healthcare, an investment of private equity firm KKR.

The combination of rising costs and fast-paced increases in interest rates, coupled to a flagging economy, is to blame, the NYT noted.

Some companies burdened by debt began dumping workers last year but are now “running out of time,” S&P analysts wrote in a 17 May research note. “Firms that were struggling well before [COVID] and the end of ultralow interest rates have now gone to their breaking point.”

Companies at the mercy of consumers’ discretionary spending are hurting the most. Bed, Bath, and Beyond and David’s Bridal, in addition to various restaurants and other retailers, have filed the most cases.

That sector is closely followed by financial firms, health care providers, and manufacturers.

The number of bankruptcies will rise as banks continue to tighten their lending criteria, Joe Davis, Vanguard’s chief economist, wrote in a note last week. Also, more companies will be pushed over the edge if the U.S. economy falls into a technical or outright default, analysts have warned. 

In the worst case, corporate bankruptcies could reach 15 percent, Bank of America analysts predicted. However, they see 8 percent as the most likely proportion, which still would encompass $1 trillion in bad debt.

TRENDPOST: This is not just a rising danger in the U.S., as we noted in “Europe’s Business Bankruptcies Climb to Eight-year High” (21 Feb 2023).

TREND FORECAST: 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 consumers are paring back spending, more investors are skittish, and the economy is slowing.

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.

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