HNewsWire:

A wave of bankruptcies and corporate defaults can be imminent as US corporations are being battered by rising loan rates.

Experts caution that as high interest rates have an adverse effect on both consumers and businesses, it may increase the likelihood of a recession. As of the end of August, 459 businesses had declared bankruptcy, according to S&P Global. The entire number of bankruptcy filings reported between 2021 and 2023 is already exceeded by that figure.

August saw the largest monthly total of corporate debt defaults since 2009.
S&P Worldwide

According to Collin Martin, a fixed income strategist at Charles Schwab and director, borrowing prices for certain companies increased by two or almost three times in 2023 compared to earlier years, which had a negative impact on company balance sheets.

The ICE BofA US High Yield Index shows that this month's 9% effective yield on below-investment-grade corporate debt is a clear indication of the growing costs for businesses.

In contrast, the yield on the US Treasury's 10-year note surged above 4.8% on Friday, returning to its highest point in sixteen years.

The number of bankruptcies is rising this year and is expected to surpass 2020, which could make 2023 the worst year for corporate bankruptcies in more than ten years.

S&P Global reports that 62 filings were made last month, bringing the total for the year to 516. That is almost twice as many as the 518 filings in the first three quarters of 2020, when the pandemic rocked the economy, and more than in the entirety of 2021 or 2022.

The total number of filings for bankruptcy protection in 2020 was 639, the highest since 827 entities sought for protection in 2010.

"The September bankruptcy filing data is out, and the Fed hikes are bankrupting more and more companies," stated chief economist Torsten Sløk of Apollo in a note on Friday.

Since March 2022, the Fed has raised interest rates eleven times in an attempt to lower inflation to the 2% target set by the central bank.

Although there has been a significant decline in inflation, firms will still incur higher borrowing costs as a result of the Fed's rate hikes because they will owe more on their existing floating-interest debt as well as any debt they refinance.

"Bankruptcies are hitting companies with high levels of debt and low earnings in the consumer discretionary, healthcare, and industrial sectors," he said.
Sector-wise bankruptcy filings by S&P Global in 2023

With more than $1 billion in liabilities, dental care startup SmileDirectClub Inc. set the stage for the largest bankruptcy of the third quarter, as reported by S&P Global.

This year has seen a number of other high-profile bankruptcy, including as Silicon Valley Bank, Yellow, and Bed Bath & Beyond.

Experts warn that a growing number of bankruptcies and debt defaults run the risk of upending the economy and bringing about a recession.

Effective yields are reported by the ICE BofA US High Yield Index to be approximately 9%.
Bank of America

"Corporate earnings are severely impacted when they have to issue debt with yields that are far higher than what they have experienced in recent years while managing their balance sheets and looking to refinance or issue new debt. They have to pay more interest, which could have an impact on their company profitability in a setting where sales are already down, according to Martin.

According to him, that's particularly difficult for "zombie firms," or businesses that lack the cash on hand to pay off their debt. In an environment of extremely low interest rates, when borrowing costs were nearly nil and businesses could easily roll over and refinance debt, a large number of zombie enterprises were able to continue.