The total amount of corporate debt defaults in the United States this year have already exceeded the amount seen in 2022.
Experts have been warning of a wave of defaults to hit the economy for some time due to higher borrowing rates.
At least fifty-five American-based companies defaulted on their loans in the first half of 2023, according to data from Moody’s Investors Services.
That is a 53 percent increase from the total number of defaults last year, when just 36 companies said they would fail to repay their debt obligations to lenders.
Moody’s blamed higher borrowing costs and tight lending standards for adding pressure on companies reliant on credit. In May alone, there were 16 corporate debt defaults worldwide, up from 12 in April.
Company Defaults on the Rise as Borrowers Unable to Repay Lenders
Economic uncertainty and higher interest rates have made it more difficult for borrowers to refinance existing loans or mature their debt, and has them with few options because they lack the cash to repay their creditors.
The aggressive monetary-tightening policies of the Federal Reserve have been a major factor in pushing many companies into default by making it harder to pay back their loans.
The spike in interest rates and the growing number of banks unwilling to issue new loans in the wake of the regional bank crisis this spring has exacerbated the situation.
Firms unable to repay their creditors are prevented from restructuring and forced to file for bankruptcy.
“Banks are battening down the hatches, hogging their bailout money instead of lending it out,” said Pete St. Onge, a Heritage Foundation economist, in a recent podcast.
“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.”
Although the Fed paused rate hikes at its last policy meeting in June, policymakers are expected to raise rates again this month in their efforts to bring down inflation to the central bank’s inflation target of 2 percent.
All of these factors have tightened financial conditions across the board, raising the risk of recession, said Moody’s.
Loans Harder to Get Since Recent Bank Crisis
“Capital is much more expensive now,” Mohsin Meghji, chairman of the restructuring advisory firm M3 Partners, told CNBC on June 24.
“Look at the cost of debt. You could reasonably get debt financing for 4 percent to 6 percent at any point on average over the last 15 years. Now that cost of debt has gone up to 9 percent to 13 percent,” he said.
Mr. Meghji said that while his firm had been busy since the fourth quarter dealing with troubled companies, he expected that even financially stable firms would start having issues refinancing due to high interest rates.
Meanwhile, Bank of America warned in May that a tougher credit environment combined with a full-blown recession could result in nearly a $1 trillion in corporate debt defaults.
Total loan defaults in the United States could rise to 11.3 percent in a credit crunch, just below the all-time-high of 12 percent seen during the Great Recession, according to Deutsche Bank.
Mark Hootnick, a partner and co-head of capital transformation and debt advisory at Solomon Partners, told CNBC that it was a safe bet there would be additional defaults this year.
“We’ve been in an environment of incredibly lax credit, where, frankly, companies that shouldn’t be tapping the debt markets have been able to do so without limitations” until now, explained Mr. Hootnick.
Corporate Defaults Likely to Hit All-Time Record
Moody’s analysts noted that the five sectors with the most defaults in 2023 were business services, health care and pharmaceuticals, retail, telecommunications, and the hospitality sector.
U.S. corporate debt defaults account for the most of the total defaults worldwide this year, with 81 firms in total failing to make payments on their debts in the first half of 2023.
The annual global default rate jumped 3.8 percent in June, up from the 2.8 percent in December 2022.
Moody’s expects global corporate defaults to continue to rise, possibly hitting 4.7 percent at the end of the year.
The report’s worst-case scenario puts the global default rate at 13.7 percent, which the firm said was unlikely, but would surpass the levels of the 2008 financial crisis.
The corporate default rate is projected to climb to as high as 4.5 percent in 2023 from the previous forecast low of 2.5 percent, according to a separate Fitch Ratings report.
The report said its projections reflected “tighter lending conditions and capital access resulting from stress in the banking sector and inflation uncertainty.”
There were 340 bankruptcy filings by July of this year, not far behind the total of 374 in 2022, according to S&P Global Market Intelligence.
Standard & Poor’s reported more than 230 bankruptcy filings through April of this year, the highest rate for that period since 2010.