U.S. Corporate Bankruptcies On the Rise

Visualization: US corporate bankruptcies on the rise

In March, Silicon Valley Bank collapsed, and a week later its parent company SVB Financial Group went bankrupt.

Many expected a wave of bank failures to continue, many of which have since been avoided, but the recent Moody’s downgrades of 10 smaller banks are beginning to crack.

The number of bankruptcies has begun to rise across the board. Eleven rate hikes since last year, combined with oversized balance sheets, are compounding challenges for companies in many sectors.

This chart shows the surge in corporate bankruptcies in 2023 based on the following data: S&P Global.

US corporate bankruptcies on the rise

2023 so far, the end 400 The company went bankrupt. Corporate bankruptcies are rising at their fastest pace since 2010 (barring the pandemic) and are double the levels this time last year.

Below are trends in corporate casualties with data as of 31 July 2023.

Represents public or privately held companies with assets or liabilities of $2 million or more at bankruptcy, or private companies with assets or liabilities of $10 million or more at bankruptcy..

According to available data, the largest number of bankruptcies occur in companies in the consumer goods and industrial sectors. Historically, both sectors have had more debt on their balance sheets than other sectors and are more exposed to risk in a rising interest rate environment.

For U.S. companies as a whole, Interest burden Increased has twenty two% These additional costs, especially in combination with rising wages, energy and materials, mean companies may be under greater pressure to cut costs, restructure debt and, in the worst case, go bankrupt.

multi-billion dollar bankruptcy

this year, 16 Companies with over $1 billion in debt have filed for bankruptcy. Most notably, it is the parent company of retail chains Bed Bath & Beyond and Silicon Valley Bank.

Mattress giant Serta Simmons filed for bankruptcy earlier this year. It once accounted for nearly 20% of American bedding sales. Rising borrowing costs have left the company unable to make payments as most of its debt matures this year.

what’s next?

In many ways, U.S. businesses have remained resilient despite soaring borrowing costs and economic uncertainty.

This can be partially explained by the better-than-expected gains seen in 2022. Some companies cut costs, while others raised prices in an inflationary environment to create a buffer against higher interest payments. Still, S&P 500 earnings have started to slow this year, dropping more than 5% year-over-year in the second quarter.

Second, the corporate debt structure is very different from what it was before the global financial crisis. Many companies held on to fixed-rate debt for long periods after the crisis.Roughly today 72% Percentage of rated US corporate bonds fixed rate.

At the same time, banks are becoming more creative with their lending structures when businesses are in trouble. There has been record “extension and modification” activity for certain types of bonds. This debt restructuring enabled the company to continue operating.

The bad news is that corporate debt ballooned during the pandemic, and eventually this debt will likely come due with much higher costs and more severe consequences.