There is a significant amount of risky debt maturing in the short term, about 20% in the US and almost 45% in Europe. The credit market has gathered some dark clouds on the horizon as the high cost of debt begins to affect American companies.
According to Trust Economics, these clouds are the start of a bankruptcy cycle, fueled by the Fed’s increased interest rates. With the Fed keeping interest rates higher for longer, higher debt costs will continue to weigh on earnings and interest coverage ratios in the coming quarters, and so companies will face higher refinancing costs. This means that borrowing money has become very expensive for businesses and many of them will go bankrupt. Bankruptcy filings are on the rise, as are default rates in the coming quarters, hitting mid-market companies in particular.
The latest data is cause for great concern
In July, Moody’s data showed that corporate defaults had already outpaced total defaults throughout 2022 by a whopping 53%. Meanwhile, data from S&P Global showed a cumulative 516 bankruptcy filings this year through September, more than in all of 2021 or 2022 and down just below the 518 filings in the first three quarters of 2020, when the pandemic shook the economy.
Fed rate hikes are responsible for higher foreclosures. And now they’re starting to affect consumers and businesses with weak balance sheets. On the other hand, high-yield bond spreads have not exploded, indicating that the corporate bond market is “as convinced as the stock market that the domestic economy remains firmly in growth mode.
Debt due
However, there is a significant amount of risky debt maturing in the near term, around 20% in the US and almost 45% in Europe. Last month, Moody’s said there was $1.87 trillion of debt maturing between 2024 and 2028 — up 27 percent from the $1.47 trillion recorded in last year’s study for the 2023-2027 period.
