Corporate bankruptcies are edging back up after a two-year lull as pressures in the economy grow, a situation sure to worsen if the nation’s political leaders fail to reach a deal to prevent the government from defaulting on its debt.
Several large recognizable companies with hundreds or thousands of workers have filed for bankruptcy protection in recent weeks, including Bed Bath & Beyond and Vice Media, although their financial troubles predated the recent economic turmoil.
Among all types of companies, large and small, the increase in bankruptcies is much more muted, with filings remaining below pre-pandemic levels and historic norms, according to Mark Zandi, chief economist at Moody’s Analytics. The total numbers are still “very, very low,” he said.
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Yet filings are creeping up as interest rates rise, pandemic-era government support dries up and sales growth slows amid a cooling economy.
“The era of low interest rates and pandemic-related government support programs helped keep companies afloat that may have otherwise had few other options," S&P analysts said of their large-company data. “Now that interest rates are back to pre-Great Recession levels and pandemic support programs are largely over, we’re seeing a fresh uptick in a possible sign that companies are running out of time.”
Any failure to reach a deal on the debt ceiling and avoid a government default would clearly worsen the problem, Zandi said.
Even a short-lived failure to pay government debts would push the economy into recession, he said. “That means businesses are going to be struggling with weaker sales. They’re probably not going to be able to get credit,” he said. “So very quickly, you will be running out of cash and having to make some pretty hard choices — layoffs, slashing investment and ultimately bankruptcy.”
Any long-lasting default would be “catastrophic” and cause a “tsunami of bankruptcies,” he added.
There were about 16,200 bankruptcy filings among all types of companies in U.S. District Courts in the first quarter — up from 12,200 a year earlier, but still well below the 21,000-or-more-a-quarter in the pre-pandemic period, data from Moody’s Analytics shows. Even those pre-pandemic numbers were relatively low in historic terms, in part because low interest rates made it easy for companies to borrow.
Companies that sell nonessential consumer items have been harder hit than other sectors as Americans curb their spending amid high inflation, S&P said. Plant-Based Pizza Boston, catalogue retailer AmeriMark Interactive and the Party City retail chain are among the recent casualties.
Last month, the dress retailer David’s Bridal filed for bankruptcy and said it was seeking a buyer, days after informing state labor departments that it planned to lay off more than 9,000 employees nationwide. The 70-year-old company said its business was weighed down by “the post-covid environment and uncertain economic conditions.”
Long-troubled Bed Bath & Beyond, which filed for bankruptcy in late April, got a boost from the wave of consumer spending during the pandemic — when Americans spent more time at home. But when the economic climate shifted and stubbornly high inflation reduced discretionary purchases, the retailer’s fortunes tumbled.
Recent filings make clear how some large, indebted companies were clobbered by the end of easy money. A Vice Media bankruptcy filing last week disclosed that the company had been cash flow negative for several years, forcing it to borrow heavily to fund operations. As interest rates rose, it became costlier for Vice to refinance those loans.
Known for its brand of “gonzo” journalism, the company, which employs more than 1,300 people globally, struck a deal to sell itself out of bankruptcy to Fortress Investment Group, Soros Fund Management and Monroe Capital.
Similarly, U.S. mattress maker Serta Simmons got some $200 million in private emergency financing at the height of the pandemic to help keep the troubled company afloat, but more recently, rising interest rates combined with a slowdown in consumer spending on goods weighed on the company, which filed for bankruptcy protection in January.
Envision Healthcare, a heavily indebted provider of staffing to hospitals, also struggled with higher interest rates before filing for bankruptcy last week. The company, owned by private-equity investors, said it faced “a whiplash-inducing onslaught of obstacles and complications,” including a labor shortage that pushed up wages and inflation in equipment costs.
Turmoil in the banking business in March also contributed to a small rise in bankruptcy filings in that sector this year, S&P said. The most notable filing was SVB Financial Group, the parent company of Silicon Valley Bank, which collapsed after a run on the bank’s deposits.