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Federal Reserve Chairman Jerome Powell leaves after speaking during a press conference following the Federal Open Market Committee meeting, at the Federal Reserve Board in Washington, D.C., on June 14, 2023.
Mandel Ngan | AFP | Getty Images
The Federal Reserve plans to continue raising interest rates to stem inflation, which means default rates for businesses are likely to increase in the coming months.
The corporate default rate rose in May, a sign that US companies are grappling with rising interest rates that are making debt refinancing more expensive as well as an uncertain economic outlook.
There have been 41 defaults in the United States and one in Canada so far this year, the highest of any region globally and more than doubled for the same period in 2022, according to Moody’s Investors Service.
Earlier this week, Federal Reserve Chairman Jerome Powell said he expected more interest rate increases this year, albeit at a slower rate, until more progress is made in bringing down inflation.
Bankers and analysts say high interest rates are the biggest cause of the malaise. Companies that need more liquidity or those that already have huge debt loads and need to refinance face a high cost of new debt.
Options often involve defaulted exchanges, that is, when a company swaps its debt for another form of debt or buys back the debt. Or, in extreme circumstances, the restructuring may take place inside or outside the court.
“Capital is much more expensive now,” said Mohsen Magji, co-founder of restructuring and advisory firm M3 Partners. “Look at the cost of debt. You can get reasonable debt financing at 4% to 6% any time on average over the last 15 years. Now the cost of debt has gone up to 9% to 13%.”
Maggi added that his company has been particularly busy since the fourth quarter in several industries. While more recently troubled companies have been affected, it is expected that companies with more financial stability will have problems refinancing due to higher interest rates.
As of June 22, there have been 324 bankruptcy filings, not far from the 374 total in 2022, according to S&P Global Market Intelligence. There were more than 230 bankruptcy filings as of April this year, and highest rate for that period since 2010.
The Bed Bath & Beyond logo is seen at the store in Williston, Vermont on June 19, 2023.
Jacob Borzycki | Norphoto | Getty Images
Envision Healthcare, the provider of emergency medical services, had the largest default in May. It had more than $7 billion in debt when it filed for bankruptcy, according to Moody’s.
Home security and alarm company Monitronics International, regional financial institution Silicon Valley Bank, retail chain bed bath behind And regional sports network owner Diamond Sports is also among the largest filings for bankruptcy so far this year, according to S&P Global Market Intelligence.
In many cases, these defaults are months, if not a quarter, in the making, said Tero Jain, co-head of capital shifting and debt advisory at investment bank Solomon Partners.
“The default rate is a late indicator of distress,” Yan said. “Often, these defaults don’t occur until well after a number of initiatives to address the balance sheet have passed, and it isn’t until bankruptcy that you see that D-capital default come into play.”
Moody’s expects the global default rate to rise to 4.6% by the end of the year, which is above the long-term average of 4.1%. This rate is expected to rise to 5% by April 2024 before starting to ease.
It’s a safe bet that there will be more defaults, said Mark Hotnick, co-head of capital transformation and debt advisory at Solomon Partners. So far, “we’ve been in an environment of incredibly credit laxity, where, frankly, companies that shouldn’t be exploiting debt markets have been able to do so without restriction.”
This is the likely reason why defaults occur in various industries. There were some industry-specific reasons, too.
“It’s not like a particular sector has a lot of defaults,” said Sharon Oh, vice president and chief credit officer at Moody’s. “Instead, there are a large number of defaults across different industries. It depends on leverage and liquidity.”
In addition to large debt burdens, Envision he was overthrown Due to healthcare woes caused by the pandemic, Bed Bath & Beyond has suffered from a large store footprint while many customers opted to shop online, and Diamond Sports has been hurt by the rise of consumers dropping cable TV packages.
“We all know the risks facing businesses right now, such as weakening economic growth, higher interest rates, and higher inflation,” Oye said. “Cyclical sectors, such as durable consumer goods, will be affected if people cut back on spending.”
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