Corporate America's Debt Dilemma - Bankruptcies Soar
The United States is witnessing a significant uptick in corporate bankruptcy filings, raising concerns about the overall health of the business sector and the challenges companies face in a high-interest rate environment. According to recent data from S&P Global Market Intelligence, June 2024 saw a staggering 75 new corporate bankruptcy filings, the highest monthly total since at least early 2020. This surge has pushed the year-to-date figure to 346 filings, marking the largest half-year total since 2010.
The pace of bankruptcies has accelerated dramatically since the beginning of 2024, rivalling even the most tumultuous months of 2020 when the COVID-19 pandemic sent shockwaves through the economy. This trend is particularly alarming as it surpasses the levels seen during the past 13 years, indicating a potentially more severe economic strain on US businesses.
Several factors are contributing to this surge in bankruptcies. High interest rates, persistent supply chain disruptions, and a slowdown in consumer spending are collectively weighing heavily on struggling companies. The consumer discretionary sector has been hit hardest, accounting for 55 of the total bankruptcies in 2024, with 16 filings in June alone. Healthcare and industrials sectors follow closely, each recording 40 filings year-to-date.
Notable companies filing for bankruptcy in June included electric-vehicle maker Fisker Group and its parent organisation, Chicken Soup for the Soul Entertainment, Lodging Enterprises, and Nevada Cooper, underscoring the diverse range of industries affected by the current economic challenges.
The surge in bankruptcies coincides with growing concerns about refinancing risks faced by US corporations. With a significant portion of high-yield debt set to mature by 2025, companies are confronted with the daunting prospect of refinancing in a higher interest rate environment. It is estimated that approximately 6% of the USD-denominated high-yield market value is due to mature in 2025.
Whilst some analysts argue that this figure is not exorbitant and that even lower-rated issuers have managed to refinance debt this year, the EPIC Fixed Income team have become increasingly cautious. The impact of higher interest rates on companies seeking to refinance in the next two years has been a growing concern, as such the Fixed Income products do not hold junk debt, particularly as we feel there is no need to move down the credit curve to access attractive yields, at this juncture.
The surge in bankruptcies and the looming refinancing challenges paint a complex picture of the US corporate sector, suggesting that whilst the overall market environment may appear attractive, the Fixed Income team believes significant risks remain.
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