US Corporate Bankruptcies Soaring as Rising Interest Rates Hit Businesses

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Updated: 1:27 AM, Sat September 16, 2023

US Corporate Bankruptcies Surge as Rising Interest Rates Impact Businesses

The number of corporate bankruptcies in the United States is set to reach a 13-year high, as the Federal Reserve’s escalating interest rates begin to take a toll on businesses, according to research conducted by Guggenheim Investments. Since the beginning of this year, more than 450 companies have sought bankruptcy protection, surpassing the annual totals of the past two years.

Guggenheim’s economists, led by Mike Bush, predict that bankruptcy filings will continue at this accelerated rate, reaching a peak unseen since 2010. Several factors contribute to this trend, including diminishing support from falling inflation rates, an expanding fiscal deficit, and a lack of widespread layoffs.

As these economic tailwinds fade, Guggenheim’s research team anticipates a slowdown in the US economy by the end of the year, possibly leading to a recession by early 2024. Typically, corporate defaults occur when companies can no longer meet their debt obligations and face a liquidity crisis.

The cost of borrowing has significantly increased due to the Federal Reserve’s policy rate hikes, which have brought rates to a level not seen in 22 years, ranging between 5.25% and 5.5%. Although the central bank is expected to keep rates unchanged at its next meeting in September, it is projected to maintain these high rates for an extended period.

During the pandemic, many corporations took advantage of low interest rates to refinance their debts, providing some relief from the Federal Reserve’s hikes. However, Guggenheim highlights that higher interest rates are not entirely detrimental to businesses. Despite facing borrowing costs ranging from 5.8% to 8.4% in the corporate bond market, overall interest expenses have decreased thanks to gains on cash and cash-like investments.

According to Guggenheim’s estimates, nonfinancial corporations in the US are earning a record $171 billion in interest income from their holdings of cash, Treasury, and Agency debt. This reflects an increase of $102 billion from the previous year. The research team expects companies in high-margin and cash flow industries to demonstrate resilience as the economy slows down, especially considering that corporations are in the best position to cover interest payments since 1960.

However, the outlook is less optimistic for heavily indebted companies. BofA Global warns that the US high-yield or junk bond market faces the challenge of a Federal Reserve that is compelled to maintain high rates due to its 2% annual inflation target.

Credit strategist Oleg Melentyev believes that the credit market can withstand a 3% Consumer Price Index (CPI) scenario, even at current valuations. However, a 4% CPI could result in cumulative defaults reaching 10%, along with significant downgrades in the high-risk CCC-ratings category. If the CPI rises to 5%, it could trigger a full-scale wave of defaults.

The increasing number of corporate bankruptcies in the US is a clear sign that rising interest rates are taking a toll on businesses. While some industries may weather the storm due to their strong cash flows, companies burdened with debt face a more challenging road ahead. The Federal Reserve’s commitment to maintaining high rates to combat inflation further compounds the situation, adding to the risks faced by businesses. As the US economy slows down, it becomes crucial for companies to carefully manage their debt obligations and liquidity to avoid becoming victims of this disturbing trend.

Frequently Asked Questions (FAQs) Related to the Above News

What is the current state of corporate bankruptcies in the United States?

The number of corporate bankruptcies in the United States is on the rise and is expected to reach a 13-year high.

What is causing this increase in corporate bankruptcies?

The increase in corporate bankruptcies is primarily attributed to rising interest rates set by the Federal Reserve.

How many companies have sought bankruptcy protection so far this year?

According to research conducted by Guggenheim Investments, over 450 companies have sought bankruptcy protection since the beginning of the year.

How does this year's number of bankruptcies compare to previous years?

The number of bankruptcies so far this year has already surpassed the annual totals for the previous two years.

What factors are contributing to the surge in bankruptcies?

The surge in bankruptcies can be attributed to factors such as diminishing support from falling inflation rates, an expanding fiscal deficit, and a lack of widespread layoffs.

What predictions are being made about the US economy?

The research conducted by Guggenheim Investments predicts a slowdown in the US economy towards the end of the year, with a possible recession looming in early 2024.

What impact have rising interest rates had on borrowing costs?

Rising interest rates have significantly increased the cost of borrowing for businesses.

Are higher interest rates entirely detrimental to businesses?

Higher interest rates are not entirely detrimental to businesses, but heavily indebted companies may face significant challenges in meeting their obligations.

Is there any indication of when this surge in bankruptcies might end?

The research does not provide a specific timeline for when the surge in bankruptcies might end, but it suggests a possible recession in early 2024.

What is the source of this information?

The information is based on research conducted by Guggenheim Investments.

Please note that the FAQs provided on this page are based on the news article published. While we strive to provide accurate and up-to-date information, it is always recommended to consult relevant authorities or professionals before making any decisions or taking action based on the FAQs or the news article.

Shreya Gupta
Shreya Gupta
Shreya Gupta is an insightful author at The Reportify who dives into the realm of business. With a keen understanding of industry trends, market developments, and entrepreneurship, Shreya brings you the latest news and analysis in the Business She can be reached at shreya@thereportify.com for any inquiries or further information.

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