Federal Reserve Chairman Jerome Powell leaves after speaking during a post-Federal Open Market Committee press conference at the Federal Reserve Board on June 14, 2023 in Washington, DC.
Mandel Gunn | AFP | Getty Images
The Fed plans to keep raising interest rates to keep inflation in check, which means corporate default rates could rise in the coming months.
Corporate default rates rose in May, indicating that US companies are facing higher debt refinancing costs and an uncertain economic outlook.
There have been 41 defaults in the United States and one in Canada so far this year, according to Moody’s Investors Service, more than anywhere else in the world and more than double the number for the same period in 2022. It’s becoming
Earlier this week, Fed Chairman Jerome Powell said he expected further rate hikes this year, albeit at a slower pace, until further progress is made in lowering inflation.
Bankers and analysts point to high interest rates as the biggest cause of financial hardship. Companies in need of more liquidity, or those already heavily indebted that need to be refinanced, face the high cost of new debt.
Options often include distressed exchanges (where a company exchanges debt for another form of debt or buys back debt). Alternatively, in dire circumstances, restructuring may occur in court or out of court.
“Capital is much more expensive now,” said Mohsin Megji, a founding partner at restructuring and advisory firm M3 Partners. “Look at the cost of debt. At any point in the last 15 years, on average, he was able to finance with debt between 4% and 6%. It’s rising.”
Megzi added that his company has been particularly busy in many industries since the fourth quarter. While the most troubled companies have been hit recently, he expects the more financially stable companies to have trouble refinancing due to higher interest rates.
There were 324 bankruptcy filings through June 22, according to S&P Global Market Intelligence, well short of the 2022 total of 374. By April of this year, more than 230 bankruptcy filings had been filed. highest rate That period since 2010.
The Bed Bath & Beyond store in San Francisco, California, USA, which closed on Monday, April 24, 2023.
David Paul Morris | Bloomberg | Getty Images
Envision Healthcare, which provides emergency medical services, was the biggest default in May. According to Moody’s, it had more than $7 billion in debt when it filed for bankruptcy.
Home security and alarm company Motronics International, regional financial institution Silicon Valley Bank, retail chain bed bath & beyond Diamond Sports, which owns the regional sports network, is also one of the largest bankruptcy filings so far this year, according to S&P Global Market Intelligence.
In many cases, such defaults take months, if not quarters, said Tero Janne, co-head of conversion and debt advisory at investment bank Solomon Partners.
“Default rates are a lagging indicator of distress,” Janne said. “These defaults often don’t happen until well after the effort to address the balance sheet, and we see a capital D default only after bankruptcy.”
Moody’s expects the global default rate to rise to 4.6% by the end of the year, above the long-term average of 4.1%. The rate is expected to rise to 5% by April 2024, before easing begins.
Mark Hutnick, who is also co-head of conversions and debt advisory at Solomon Partners, said more defaults are sure to come. So far, “we’re in an incredibly lax credit environment that, frankly, has allowed unbridled use of the bond market by companies that shouldn’t be using it.”
This is likely why defaults have occurred in various industries. There were also industry-specific reasons.
“We are not seeing a high rate of defaults in any one sector,” said Sharon Wu, vice president and senior credit officer at Moody’s. “Rather, we have seen a significant number of defaults in various industries. It depends on leverage and liquidity.”
In addition to its large amount of debt, Envision collapsed Bed Bath & Beyond suffers from large store footprints while many customers choose to shop online due to medical issues caused by the pandemic, while Diamond Sports drops cable TV packages for consumers hit by an increase in
“We all know the risks facing businesses today, such as slowing economic growth, high interest rates and high inflation,” Wu said. “If people cut spending, cyclical sectors such as consumer durables will be affected.”
