U.S. corporations are experiencing a surge in bankruptcy filings, reaching the highest rate since 2010. Despite the S&P recently hitting 2023 high, this bankruptcy crisis indicates a tightening credit squeeze due to rising interest rates and limited access to financial markets for all but the most creditworthy borrowers.
Large companies, in particular, have been significantly affected.
The number of bankruptcy filings in the first four months of this year has surged, with 236 filings recorded. This figure has more than double the number of filings observed in 2022. This pace of filings is the fastest year-to-date since 2010, as S&P Global Market Intelligence reported.
Numerous well-known companies with substantial workforces have sought bankruptcy protection recently, including Bed Bath & Beyond and Vice Media. However, it’s important to note that their financial troubles predate the current economic turmoil.
Bankruptcy filings have not slowed down in May either. In just one week, eight companies with liabilities exceeding $500 million filed for Chapter 11 bankruptcy, with five filing within a 24-hour. This marks the busiest week for Chapter 11 filings this year, surpassing the monthly average of three filings seen in 2022.
Among the large filings in May were the bankruptcies of Vice Media, Envision Healthcare, and Monitronics International, all of which had at least $50 million in liabilities. Notably, this week stands out as the most active seven-day period this year, surpassing a week in late February that saw insolvency proceedings initiated by firms like Lucira Health, Akorn, and the former SPAC Starry Group.
So far, in 2023, twenty-seven major debtors have filed for bankruptcy, compared to forty throughout 2022, according to data compiled by bankruptcydata.com.
While the increase in bankruptcies is somewhat less pronounced across all types of companies, both large and small, it remains below pre-pandemic levels and historical norms. Mark Zandi, the chief economist at Moody’s Analytics, suggests that filings, particularly among large unprofitable companies, are rising rapidly due to higher interest rates, the waning of pandemic-era government support, and slowing sales growth amidst a cooling economy.
Moody’s Analytics data reveals that in the first quarter, there were approximately 16,200 bankruptcy filings among all types of companies in U.S. District Courts. Although this represents an increase from the previous year’s 12,200 filings, it remains well below the pre-pandemic quarterly average of 21,000 or more. Even those pre-pandemic numbers were relatively low from a historical standpoint, partially due to companies benefiting from low-interest rates that facilitated borrowing.
S&P Global forecasts that the trailing twelve-month default rate for speculative-grade securities will rise from 2.5% to 4.5% by early 2024.
Analysts at S&P attribute the recent uptick in bankruptcies to the end of the era of low-interest rates and the winding down of pandemic-related government support programs. They believe that companies are now facing a sense of urgency as time runs out, given the return of interest rates to pre-Great Recession levels.
Yields on junk bonds have more than doubled since mid-2021, as the Bloomberg US High Yield Index indicates. The Federal Reserve has cautioned that lenders may further restrict credit supply to businesses following recent turmoil in the banking sector.
Bill Derrough, an investment banker at Moelis, predicts an increase in “hard restructurings” resulting from higher debt levels from Covid-related borrowing and rising interest rates. These restructurings will likely trigger insufficient funds and an inability to refinance maturing debt. Derrough notes that some companies have exhausted their options and are now left with no alternatives.