A person holds a sign advertising a sale at Century 21, a retail outlet that announced it was filing for bankruptcy and closing its stores due to the economic impact of COVID-19, in New York City, on Sept. 26, 2020. (Andrew Kelly/File/Reuters)
U.S. corporate bankruptcy filings rose in August, according to new data from S&P Global Market Intelligence.
The S&P Bankruptcy Tracker found that there were 38 filings last month, up from 31 in July. The industrials sector has been hit the hardest in 2022, with 41 filings year to date, followed by the consumer discretionary sector, which has submitted 38 filings so far this year. The health care sector also made the list, as 23 firms filed for bankruptcy.
Meanwhile, the largest bankruptcies, with more than $1 billion in liabilities this year have been Carestream Health, OSG Group Holdings, Aearo Technologies, Celsius Network, and Revlon.
The S&P Global report was released as British movie chain Cineworld announced on Sept. 8 that it’s filing for bankruptcy protection in the United States. As it struggles with a net debt level of about $8.9 billion, which includes lease liabilities, Cineworld aims to restructure its debt and emerge from Chapter 11 in the first quarter of next year.
Source: S&P Global Market Intelligence
Analysts believe this could become more common in the months ahead, as rising interest rates begin weighing on the private sector.
“Easy access to funding has kept struggling companies afloat during much of the pandemic,” the report stated. “This year, however, the Federal Reserve’s interest rate hikes have limited credit availability, and banks have tightened lending standards likely due to worsening market conditions.”
In addition, creditors are concerned that high inflation will reduce borrowers’ debt-servicing abilities, which could bolster their risk exposure, S&P Global noted.
Many businesses took on debt during the coronavirus pandemic to survive and keep their doors open. In total, non-financial corporate debt stood at approximately $12.2 trillion in the first quarter, according to data from the Federal Reserve.
Source: S&P Global Market Intelligence
Despite the increase in August, just 249 businesses have filed for bankruptcy this year, which is the lowest “comparable period going back to at least 2010,” according to S&P Global. But while bankruptcy filings are below historical averages, market experts think that these numbers will start to rise in the coming quarters.
“U.S. government stimulus programs, low borrowing rates, and high debt forbearance helped disrupt predictions of continued growth in the number of bankruptcy filings,” Nick Yavorsky, a principal at Cornerstone Research, said in a report. “There are some concerns that increased corporate debt levels, rising interest rates, and inflation, and a potential global recession may contribute to an increase in bankruptcy filings.”
Source: S&P Global Market Intelligence
The Fed’s Aim of Price Stability
The U.S. central bank has reiterated that it intends to keep raising interest rates to curb rampant price inflation, even if it results in slower economic growth. The Fed’s chief objective is to resurrect price stability, Chairman Jerome Powell says.
“The Fed has the responsibility for price stability, by which we mean 2 percent inflation over time,” Powell stated during a Cato Institute event on Sept. 8. “The longer inflation remains well above target, the greater the risk the public does begin to see higher inflation as the norm, and that has the capacity to raise the costs of getting inflation down.”
So far, a broad array of surveys hasn’t discovered debt as a significant concern for businesses.
“The uncertainty in the small-business sector is climbing again as owners continue to manage historic inflation, labor shortages, and supply chain disruptions,” Bill Dunkelberg, chief economist at the National Federation of Independent Business, said in a statement. “As we move into the second half of 2022, owners will continue to manage their businesses into a very uncertain future.”
CEIC, a financial data services firm, reported that U.S. business confidence fell by 14.2 percent in July, maintaining a downward trend from December 2021.
Companies could begin focusing on their balance sheets as they attempt to navigate through turbulent economic conditions, says Mike Davis, the founding partner of multistrategy asset management firm Olive Tree Ridge.
“Operators realize that they need to shore up their balance sheets,” he recently told The Epoch Times. “You know, weathering the storm and battening down the hatches. Let’s bolster our balance sheet, and let’s see what we can get done to kind of mitigate any of these surprises.”
In May, Tesla CEO Elon Musk wrote in a tweet that “some bankruptcies need to happen” as the U.S. economy slips into a recession. He asserted that the country was due for a “rude awakening” after a prolonged span of “raining money on fools for too long.”
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