The number of large corporate bankruptcies has begun to accelerate to levels seen during the last two U.S. recessions, with more companies trying to stay afloat as the Federal Reserve rate hikes hit. It shows that you are struggling.
According to Torsten Srock, chief economist at Apollo Global Management, weekly bankruptcy filings approached their highest level since the start of the coronavirus crisis in 2020 (see graph), most recently based on a four-week moving average. And nearly eight bankruptcy filings a week.
The graph only shows bankruptcies of large companies with debts greater than $50 million. Their bankruptcy rates now rival levels seen after the global financial crisis of 2007-2008.
“This data points to the beginning of a default cycle,” Torsten Throck, chief economist at Apollo Global Management, said in a follow-up email to MarketWatch. “And Fed Chairman Powell’s statement today that rates will stay high for an extended period of time raises the question of what these trends will look like in the coming quarters if the Fed starts cutting rates in 2024. ”
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But similar weakness is not yet reflected in the bond market for companies with high yields or ‘junk’ credit ratings below the BBB- threshold. That’s largely because homeowners and other businesses devoured cheap debt to lock in low borrowing costs during the coronavirus crisis, when the Fed’s policy rate was near zero for years. be.
“Defaults are still benign at this point,” said John McClane, portfolio manager for high-yield and corporate credit strategies at Brandywine Global Investment Management.
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A total of 20 US companies with a “junk” rating have defaulted on $34.2 billion in the past year, according to CreditSights. Of these, 10 defaults occurred in 2023 affecting $11 billion of debt.
The CreditSights team expects the U.S. default rate to end this year at 3% and rise to 4% in the first quarter of 2024, but still below the historical average of 5%.
McClain also expects high-yield defaults to rise in the coming months, but the impact will be well below the carnage of 2008.
He added that the rise in corporate bankruptcies in 2023 was largely due to stress in private credit and leveraged loans, with floating-rate debt resetting to highs at regular intervals since the Fed began raising rates last year. pointed out that
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Similar to the sluggish commercial mortgage market, Wall Street often incorporates corporate leveraged loans into bond deals, in this case called collateralized loan obligations (CLOs). The sector is under pressure, withdrawing funds available to companies seeking variable-rate loans.
Notably, the roughly $1.5 trillion U.S. high-yield bond market is largely made up of fixed-income securities that mature in about seven to 10 years, and the borrowers in this sector are the Fed. It gives them some breathing room from rate hikes.
“The key thing about floating rate debt is that it’s beneficial to the lender up to a point,” McLane said, adding that rising interest rates will make more money until the debt burden becomes too heavy for companies to sustain. He added that he would get a lot of income.
A U.S. recession is still avoidable as Fed Chairman Jerome Powell meets with other world central bank governors in Portugal, but most of his colleagues expect two more rate hikes this year. Shares were mixed on Wednesday after the announcement.
Dow Jones Industrial Average
DJIA
The S&P 500 is down 0.4%.
SPX
0.1% down from the Nasdaq Composite
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It rose 0.2%, according to FactSet. 10 year US Treasury yield
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It was about 5 basis points lower at 3.72%.
