Bankruptcy filings in the U.S. have surged as rising interest rates, a high debt burden and stubborn inflation pummel the corporate sector and experts are predicting an increase in companies defaulting on debt repayments.
Chapter 11 bankruptcy filings soared by 68 percent in the U.S. in the first half of the year compared to 2022, according to data shared by Epiq Bankruptcy, a provider of U.S. bankruptcy filing data, on Monday.
Recent data from S&P Global Market Intelligence show that the number of U.S. companies that have gone bankrupt between January and May is higher than in the first five months of any year since 2010.
Among the most striking examples were Silicon Valley Bank, the California lender whose collapse earlier this year threatened a system-wide crisis of the banking sector in the U.S., Envision Healthcare Corp, Bed Bath & Beyond, Party City Holdco, Lordstown Motors, and Kidde-Fenwal.
At the same time, defaults—when a borrower falls behind on payments—have also been surging in the U.S. According to Moody's Investor Service, there's been a total of 41 corporate defaults since the beginning of the year—more than double what was reported during the same period last year.
Though their specific circumstances were different, all the companies that went bankrupt or defaulted this year suffered from interest rates suddenly surging last year as the Federal Reserve tried to bring down rising inflation. For years, the companies had enjoyed an era of relatively easy money, and many—like SVB—had made investments that counted on the situation remaining the same for the foreseeable future.
With 10 consecutive rate hikes between last year and this year, the Fed has raised its key interest rate to between 5 and 5.25 percent. In June, the Fed decided to leave its key interest rate unchanged as it assesses the impact of its strategy on the U.S. economy.
Economist Mark Hootnick, co-head of capital transformation and debt advisory at Solomon Partners, told CNBC that there will be more defaults in the future. "We've been in an environment of incredibly lax credit, where, frankly, companies that shouldn't be tapping the debt markets have been able to do so without limitations," he said.
Moody's experts agree. The company expects the global default rate to rise to 4.6 percent by the end of the year—half a percentage point higher than the long-term average of 4.1 percent. The rate is projected to rise to 5 percent by April 2024 before starting to come down.
Inflation has fallen back from its peak of 9.1 percent in June last year but is still relatively high, at 4 percent year-on-year in May.
The Fed said in June that it was going to raise interest rates twice more before the end of the year.
Newsweek has contacted Moody's for comment.
Uncommon Knowledge
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Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
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Giulia Carbonaro is a Newsweek Reporter based in London, U.K. Her focus is on U.S. and European politics, global affairs ... Read more
