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Distress in corporate finance is increasing. In the near-zero interest rate environment during the pandemic and through February 2022, corporations could take on more debt or extend existing debt without adding much to their debt burdens. In addition, government support helped keep many U.S. businesses afloat during pandemic lockdowns. That helped keep corporate and personal bankruptcy filings low.
Since then, fiscal relief has disappeared. And with the Federal Reserve pushing up its policy rate by 500 basis points in 15 months, financing costs have jumped.
For some it was too much. U.S. corporate bankruptcy filings in January-April 2023 rose to 236, more than double the 109 during the same period in 2022 and higher than the first four months of any year since 2010, according to S&P Global Market Intelligence.
The month-to-month movement proves choppier. S&P Global Market Intelligence recorded 54 corporate bankruptcy petitions in April, down from 70 in March.
A group of Jefferies equity analysts covering banks, led by Ken Usdin, recently pointed out that U.S. bankruptcy fiilngs have increased each quarter since Q4 2021, which appears to have been the post-pandemic bottom. Projecting April’s bankruptcy trends to a quarterly basis, total bankruptcy filings remain low by historical average levels, but are tracking 24% Y/Y for Q2, led by medium-sized bankruptcies, which are trending 64% higher, they said.
Not surprisingly, more companies are defaulting on their debt, and not just in the U.S. The global corporate default tally increased to 50 in January-April 2023, up more than 75% from the same period in 2022 and 25% from the 10-year average, S&P Global Ratings said. The increase of “weakest links” — issuers rated ‘B-‘ or below with either negative outlooks or on CreditWatch negative — rose by 18 in March to 299, “indicating increased future default pressure.”
The Jefferies analysts said they’ll be watching banks closely for their commercial & industrial net charge-offs as a warning signal. “Large bankruptcies for 2Q23 are tracking in line with 1Q23 large bankruptcies through April,” they said. “We would expect bankruptcies and credit losses to continue to normalize higher over the coming quarters.” According to their analysis, C&I net charge-off rates will likely rise again in Q2.
Food-related and industrial sectors are seeing the biggest increases in filings, Usdin and colleagues said. The sectors that were hardest-hit early in the pandemic, such as oil & gas and hotels/gaming, are showing continued improvement, Jefferies said. But more industries are starting to see Y/Y increases in bankruptcies, “notably in real estate, food-related companies and materials/metals.”
Their preferred leading indicator for future credit losses is the Federal Reserve’s Senior Loan Officer Opinion Survey, which showed continued tightening of credit standards in Q1. It also showed weaker demand for commercial loans. “Tight historical correlations suggest slowing/declining loan growth and higher loss rates ahead (only beginning to show in 1Q23 results),” Usdin and colleagues said.
Some Recent Bankruptcy Coverage:
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