Corporate Bankruptcies Are Soaring; 2023 Filings Highest Since 2010

An aerial view of scenes around Manhattan from a Royal Navy helicopter in New York City on Oct. 19, 2018. (Christopher Furlong/Getty Images)

The most recent data from S&P Global show that corporate bankruptcies are picking up again.

More than 230 companies have filed for bankruptcy through the end of April, more than double the comparable figure a year ago. UBS also found in a recent study that bankruptcies worth $10 million or more had jumped to an average of about eight per week by late February.

Just last week, corporate America experienced the worst 48-hour stretch of bankruptcies since at least 2008, according to Bloomberg.

James Gellert, CEO of Rapid Ratings International, a company that evaluates the financial health of public and private companies, said many of these troubled companies have similar traits.

“The big themes are that they have degraded in operational quality and have debt that has been unsustainable,” he said. “That is the formula for bankruptcy in this market.”

Retail companies are some of the hardest hit in the current economic environment because they are susceptible to consumer buying changes, Gellert said.

Companies with weaker balance sheets may continue to feel the pain all the way into next year. The corporate default rate for companies with lower credit quality will peak in early 2024, said Moody’s Investors Service, before falling as economic growth re-accelerates.

“Consumers will find that some brands are either unable to maintain their businesses or are having to change their business models,” Gellert said. He estimates that consumer-facing companies with strong customer loyalty will fare better than others.

Meanwhile, researcher and economist Peter St Onge boiled the situation down to one key factor: “Banks aren’t lending,” St Onge said in a video tweet.

“Banks are battening down the hatches, hogging their bailout money instead of lending it out,” he continued.

“That credit crunch means not only do we get bankruptcies like in any recession, on top of that, we get a lending wall that cuts off even the healthy businesses. Of course, their jobs go down with them.”

“Major banks are now setting aside loss reserves,” he added. “So Citi doubled theirs, Morgan Stanley quadrupled the money they set aside to cover failed loans.”

St Onge also noted that the United States isn’t technically in a recession, defined as two consecutive quarters of declining GDP growth.

Fed Rate Hikes

As the Federal Reserve (Fed) hikes rates, companies with less stable finances face the adverse effects of a “credit crunch,” an economic situation in which financial institutions tighten up requirements for obtaining a loan, meaning fewer loans are available. These companies struggle to get loans; if they do, they must pay higher interest rates for that borrowing.

Michael Pearce, lead U.S. economist at Oxford Economics, noted that banks’ tightening lending standards “will starve firms and households of credit and help push the economy into recession in the second half of this year.”

The less lending that banks do, the more likely that various firms are to cut back on investment, which, in turn, slows the growth of employment and the economy overall.

Although Fed Chair Jerome Powell has left the door open to potentially pausing after 10 consecutive hikes, the pain is not over for debt-laden companies. Rising rates will have a “lagged impact” on corporate balance sheets, Bespoke Investment Group co-founder Paul Hickey said.

“If you look back to the financial crisis, the market bottomed in March of 2009, and you were still seeing bankruptcies throughout that year, even as the market was doing better,” he said.

“There’s still going to be trouble going forward.”

Since March 2022, the Fed has been raising interest rates from zero percent to a range of 5.0–5.25 percent in an effort to battle elevated inflation.

The Associated Press and CNN Wire contributed to this report.