A wave of corporate bankruptcies is expected to sweep the US in the near future, as the effects of the fastest tightening of monetary policy in decades become visible.
Already in May, the rate of corporate bankruptcies in the US rose as businesses grappled with higher interest rates that make it more expensive to refinance their debt, as well as an uncertain economic outlook. So far this year there have been 41 bankruptcies in the US and one in Canada, the most of any region in the world and more than double the number for the same period in 2022 (data from Moody’s Investors Service).
The level of interest rate is prohibitive
Nevertheless, during the previous week Fed Chairman Jerome Powell announced further interest rate hikes during this year, albeit at a slower pace, in order to curb inflation.
High interest rates are the main cause of economic distress. And this is because companies that either need more liquidity or those that already have large debt burdens and need refinancing are faced with the high cost of new debt.
Businesses could reasonably get debt financing for 4% to 6% anytime on average over the last 15 years. Now that cost of debt has risen to 9% to 13%.
Bankruptcy applications
As of June 22, 324 U.S. bankruptcy filings had been filed, approaching a total of 374 filings in 2022, according to S&P Global Market Intelligence. By April this year, more than 230 bankruptcy filings had been filed, the highest number for that period since 2010.
Envision Healthcare, a provider of emergency medical services, collapsed in May after accumulating more than $7 billion in debt. Major companies and banks that failed during this period include Monitronics International, Silicon Valley Bank, Bed Bath & Beyond and Diamond Sports.
New bankruptcies
The global default rate is expected to rise to 4.6% by the end of the year, higher than the long-term average of 4.1%. This figure is projected to rise to 5% by April 2024 before beginning to decline. Higher interest rates are shaking up businesses that, in an environment of loose credit, have made unrestricted use of debt markets, something that would never have been allowed under normal circumstances. Weakening economic growth, high interest rates and high inflation are key and common risks faced by all businesses.
