New data released by S&P Global Market Intelligence reveals that an increasing number of U.S. companies are succumbing to the pressure of higher interest rates, resulting in corporate bankruptcies reaching their highest levels in the first half of a year since 2010.
In the first six months of 2023, a total of 340 corporate bankruptcies were recorded, surpassing every other comparable period in the past 13 years. This represents a significant 93% increase compared to the same period last year, and even higher than the spike seen in 2020 during the early stages of the COVID-19 pandemic.
The month of June alone saw 54 corporate bankruptcy filings, which is the same number as May. Among the notable companies that filed for bankruptcy last month were Lordstown Motors, Rockport Co., Instant Brands Acquisition Holdings, and iMedia Brands.
Lordstown Motors Corp., for instance, filed for bankruptcy on June 27th, with plans to restructure its business and find a buyer. The company’s assets include its Endurance pickup truck and related resources. Similarly, Instant Brands Acquisition Holdings Inc. sought bankruptcy protection on June 12th, citing the impact of tightening credit terms and higher interest rates on its liquidity levels. The company has already secured $132.5 million from existing lenders and intends to continue discussions with its financial stakeholders.
So far this year, 15 companies with liabilities exceeding $1 billion have filed for bankruptcy, including Cyxtera Technologies, Diebold Holding, Bed Bath & Beyond, Diamond Sports Group, and Party City.
Epiq Bankruptcy, a data provider specializing in U.S. bankruptcy filings, confirms that a total of 2,973 commercial Chapter 11 bankruptcies were filed in the first half of 2023, reflecting a 68% increase compared to the same period last year.
The leading cause of the surge in corporate bankruptcies is believed to be the higher interest rates. Many businesses are burdened with significant debt loans that require refinancing or need additional liquidity to stay afloat.
Gregg Morin, Vice President of Business Development and Revenue at Epiq Bankruptcy, states that the increase in filings highlights the economic challenges faced by both businesses and individuals. He emphasizes the importance of timely and accurate data in enabling bankruptcy professionals to analyze stakeholder volumes and make informed decisions.
The situation could worsen if the Federal Reserve proceeds with two more rate hikes this year. Market futures currently anticipate a quarter-point increase to the benchmark fed funds rate during the upcoming Federal Open Market Committee (FOMC) policy meeting.
In a recent report, Fitch Ratings projects that the corporate default rate could rise to as high as 4.5% in 2023. This is an upward revision from their previous forecast of 2.5%. The updated projections reflect tighter lending conditions and limited capital access resulting from stress in the banking sector and inflation uncertainties.
However, some argue that indicators in the corporate bond market suggest a less severe scenario. The interest rate spreads between the 10-year U.S. Treasury note and investment grade and high-yield corporate bonds remain within their average range over the past 25 years. According to John Lynch, CIO at Comerica Wealth Management, the bond market signals lower likelihood of severe recession and fewer corporate defaults.
Nevertheless, economists point out that corporate bankruptcies typically occur one to two years into a recession. The current trend of bankruptcies occurring alongside the expansion of the U.S. economy indicates the severity of the situation.
Heritage Foundation economist Pete St. Onge attributes the rise in bankruptcies to banks’ reluctance to lend. He suggests that banks are hoarding their bailout funds instead of making loans, which creates a credit crunch and affects even healthy businesses, leading to job losses.
Financial institutions have been tapping into emergency lending facilities, such as the Bank Term Funding Program (BTFP) launched by the Federal Reserve following the Silicon Valley Bank collapse in March. The latest data from the Federal Reserve shows that the BTFP dropped for the first time since May, after reaching a record high above $103 billion at the end of June. Despite financial institutions accessing these funds, companies are finding it increasingly challenging to secure credit, exacerbating what many consider a credit crunch.
A recent survey by Goldman Sachs found that three-quarters of small business owners are concerned about accessing capital due to banking stress leading to tighter lending conditions. The National Federation of Independent Business (NFIB) Small Business Survey also revealed that accessing credit has become more difficult for small business owners compared to the previous survey.
In conclusion, the rising number of corporate bankruptcies in the U.S. is primarily attributed to higher interest rates, making it challenging for companies with substantial debt or liquidity needs to survive. The situation is further complicated by the hesitance of banks in lending, causing what many perceive as a credit crunch. The impact of these bankruptcies on the economy and job market underscores the need for timely and accurate data to guide stakeholders in making informed decisions.
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