Macro

Record Week for Business Bankruptcies Amid Rising Rates

Record corporate bankruptcies hit, driven by high interest rates and low consumer spending, with a notable rise in pre-bankruptcy deal-making.

By Jack Wilson

4/3, 16:41 EDT
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Key Takeaway

  • This week ties for the record busiest period for major corporate bankruptcies, signaling a rapid increase in business failures.
  • The surge reflects higher interest rates and reduced consumer spending, with a 43% jump in commercial insolvencies in Q1 2024.
  • Despite the uptick, experts suggest the economy's broad diversity may cushion overall impact, highlighting sector-specific struggles.

Record Bankruptcy Filings

This week marks a significant uptick in major corporate bankruptcies, tying for the busiest three-day period on record. If the current pace persists, this week could surpass the end of April 2009's record, set during the aftermath of the Great Recession. Michael Hunter, vice president at Epiq, notes a steady increase in bankruptcies across the board for 20 months, attributing the trend to rising interest rates and decreased consumer spending. Among the notable filings are two telecommunication and two pharmaceutical companies, with Delaware being a primary jurisdiction due to its corporate-friendly laws.

Pre-Bankruptcy Deal-Making

A notable strategy among some of the bankrupt companies, including a SoftBank-backed window maker and two telecommunication firms, is negotiating deals with lenders prior to filing for bankruptcy. This approach aims to streamline the restructuring process, reducing costs and the duration of court supervision. Such pre-bankruptcy agreements have become a standard practice in corporate restructurings, reflecting a shift towards more efficient insolvency resolutions.

Leveraged Loans Under Scrutiny

The leveraged loan market is facing increased pressure, with junk-rated companies' debt-service coverage ratios dropping to their lowest since the pandemic. The Federal Reserve's continued high-interest-rate policy has escalated the financial strain on these companies, pushing the leveraged loan default rate to 6.22%. This situation is exacerbated by the Fed's cautious stance on rate cuts, with Chair Jerome Powell indicating a need for more evidence of inflation moving towards the 2% target before considering rate reductions. The heightened risk in the leveraged loan market underscores the broader challenges faced by high-yield debt investors.

Street Views

  • Michael Hunter, Epiq (Neutral on the market):

    "Total bankruptcies — including consumer, small business and big corporates — have been climbing steadily for 20 months. The trend reflects higher interest rates and a pullback in consumer spending."

  • Derek Abbott, Morris, Nichols, Arsht & Tunnell (Neutral on the economy):

    "We have such a broad and diverse economy that even when there is good stuff happening overall, there is a portion of the business sector that is still struggling. Telecom, retail and pharmaceutical companies are all facing headwinds today."