Corporate bankruptcies are on the rise as new strains hit the economy

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Corporate bankruptcies are picking up again after a two-year lull as pressure on the economy mounts. The situation is sure to get worse if the country’s political leaders fail to reach an agreement to prevent the government from defaulting.

According to S&P Global Market Intelligence, the increase is most visible among large companies, where there were 236 bankruptcy filings in the first four months of this year, more than double the 2022 level.

Several large well-known companies with hundreds or thousands of workers have filed for bankruptcy protection in recent weeks, including Bed Bath & Beyond and Vice Media, despite their financial problems predating the recent economic turmoil.

According to Mark Zandi, chief economist at Moody’s Analytics, the rise in bankruptcies has been much more muted for all types of businesses, large and small, with filing numbers below pre-pandemic levels and below historical norms. The totals are still “very, very low,” he said.

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Still, enrollments are picking up as interest rates rise, pandemic-era government support comes to an end, and revenue growth slows amid a slowing economy.

“The era of low interest rates and pandemic-related government support programs has helped keep companies afloat that might otherwise have had few other options,” S&P analysts said of their data on large companies. “Now interest rates are back to pre-Great Recession levels.” While the pandemic support programs have largely ended, we are seeing a rebound – a possible sign that companies are running out of time.”

Failure to reach an agreement on the debt ceiling and avoid a sovereign default would significantly worsen the problem, Zandi said.

Even a short-term default on the national debt would plunge the economy into recession, he said. “That means companies will struggle with weaker sales. You probably won’t get credit,” he said. “So you’re going to run out of money very quickly, and you’re going to have to make some pretty tough decisions — layoffs, cut back on investments, and ultimately bankruptcy.”

Any prolonged default would be “catastrophic” and would trigger a “tsunami of bankruptcies,” he added.

Shows data from Moody’s Analytics. Even pre-pandemic numbers were relatively low by historical standards, in part because low interest rates made it easier for companies to borrow.

Companies that sell non-essential consumer goods have been hit harder than other sectors as Americans rein in spending amid high inflation, S&P said. Recent victims include Plant-Based Pizza Boston, catalog retailer AmeriMark Interactive, and retail chain Party City.

Last month, clothing retailer David’s Bridal filed for bankruptcy and said it was looking for a buyer, just days after informing state employment agencies it planned to lay off more than 9,000 workers nationwide. The 70-year-old company said its business has been impacted by “the post-Covid environment and uncertain economic conditions”.

Long-struggling Bed Bath & Beyond, which filed for bankruptcy in late April, was buoyed by the surge in consumer spending during the pandemic — as Americans were spending more time at home. But as the economic climate changed and stubbornly high inflation limited discretionary buying, the retailer’s fortunes plummeted.

Recent filings highlight how some large, leveraged companies have been hurt by the end of easy money. A bankruptcy filing by Vice Media last week revealed that the company had negative cash flow for several years, forcing it to borrow heavily to fund operations. As interest rates rose, it became more expensive for Vice to refinance those loans.

Known for its “gonzo” journalism, the company, which employs more than 1,300 people worldwide, has struck a deal to sell itself to Fortress Investment Group, Soros Fund Management and Monroe Capital following bankruptcy.

Similarly, at the height of the pandemic, US mattress maker Serta Simmons received around $200 million in private emergency funding to keep the troubled company afloat. which filed for bankruptcy protection in January.

Envision Healthcare, a heavily indebted provider of hospital staffing services, also struggled with higher interest rates before filing for bankruptcy last week. The company, which is owned by private-equity investors, said it faced “a violent onslaught of obstacles and complications,” including a labor shortage that drove up wages and drove up equipment costs.

According to S&P, the turmoil in banking in March also contributed to a slight increase in bankruptcy filings in this sector this year. The most notable news item was SVB Financial Group, the parent company of Silicon Valley Bank, which collapsed after a run on the bank’s deposits.