Federal Reserve Chairman Jerome Powell leaves office after speaking at a news conference after the Federal Open Market Committee meeting at the Federal Reserve in Washington, DC, June 14, 2023.
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The Fed plans to continue raising interest rates to curb inflation, which means corporate defaults are likely to rise in the coming months.
Corporate defaults rose in May, a sign that U.S. companies are grappling with rising interest rates that make refinancing their debt more expensive and an uncertain economic outlook.
So far this year, there have been 41 defaults in the U.S. and one in Canada, the most of any region in the world and the same period in 2022, according to Moody’s Investors Service. twice as much.
Earlier this week, Fed Chairman Jerome Powell said he expected more rate hikes this year, albeit at a slower pace, until more progress was made in reducing inflation.
Bankers and analysts say high interest rates are the biggest culprit for the woes. Companies that need more liquidity or already have large debts that need to be refinanced face high costs of new debt.
These options often include distressed swaps, in which a company swaps its debt for another form of debt or buys back debt. Or, in dire cases, the reorganization may take place in or out of court.
“Capital is more expensive now,” said Mohsin Meghji, founding partner at restructuring and advisory firm M3 Partners. “Look at the cost of debt. On average, at any point in the past 15 years, you can reasonably get 4% to 6% debt Financing. Now the cost of debt has risen to 9% to 13%.”
Meggie added that since the fourth quarter, his firm has been particularly busy across a broad range of industries. While struggling companies have suffered recently, he expects companies with higher financial stability to have refinancing problems due to high interest rates.
As of June 22, there were 324 bankruptcy filings, not far off the 2022 total of 374, according to S&P Global Market Intelligence. As of April this year, there were more than 230 bankruptcy filings, highest rate The period since 2010.
A Bed Bath & Beyond store is closed on Monday, April 24, 2023, in San Francisco, California, U.S.
David Paul Morris | David Paul Morris Bloomberg | Getty Images
Emergency medical services provider Envision Healthcare was the biggest defaulter in May. The company filed for bankruptcy with more than $7 billion in liabilities, according to Moody’s.
Home security and alarm company Monitronics International, regional financial institution Silicon Valley Bank, retail chain Bed bath and others The company and regional sports network owner Diamond Sports are also among the largest bankruptcy filings so far this year, according to S&P Global Market Intelligence.
Tero Jänne, co-head of capital transformation and debt advisory at investment bank Solomon Partners, said that in many cases, these defaults have lasted for months, if not quarters.
“Default rates are a lagging indicator of distress,” Gianney said. “A lot of times these defaults don’t happen until after a series of moves to address the balance sheet issues have passed, and it’s not until the bankruptcy that you see the capital D defaults come into play.”
Moody’s expects the global default rate to rise to 4.6% by the end of the year, above the long-term average of 4.1%. The rate is expected to rise to 5% by April 2024 before starting to slow down.
To be sure, there will be more defaults, said Mark Hootnick, co-head of capital transformation and debt advisory at Solomon Partners. So far, “we’ve been in an environment of extremely easy credit, and companies that, frankly, shouldn’t be able to tap the debt markets have been able to do so without restriction.”
This may be why defaults have occurred across industries. There are also some industry-specific reasons.
“It’s not that there’s been a lot of defaults in one particular industry,” said Sharon O’Sharon, a Moody’s vice president and senior credit officer. “Rather, there have been quite a few defaults across industries. It depends on leverage and liquidity.”
In addition to the huge debt burden, Envision Energy also dumped Bed Bath & Beyond had larger stores due to health care concerns caused by the pandemic, while many customers opted to shop online, while Diamond Sports was hurt by an increase in consumers ditching cable TV packages.
“We all know the risks that businesses are facing right now, such as weak economic growth, high interest rates and high inflation,” Ou said. “If people cut spending, cyclical industries like consumer durables will suffer.”
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