Corporate Bankruptcies Reach Highest Level Since 2010

Customers shop at a Bed Bath & Beyond store in Forest Park, Ill., on January 5, 2023. Scott Olson/Getty Images

A growing number of U.S. firms are collapsing under the weight of higher interest rates as corporate bankruptcies reached their highest first-half levels since 2010, new data show.

In the first six months of 2023, there were 340 corporate bankruptcies, topping every other comparable span in 13 years, according to S&P Global Market Intelligence. That’s up 93 percent from the same time a year ago and higher than in 2020, when there was a spike during the early days of the COVID-19 pandemic.

There were 54 recorded corporate bankruptcy filings in June, the same number as in May. Last month, some of the most notable companies to submit filings were Lordstown Motors, Rockport Co., Instant Brands Acquisition Holdings, and iMedia Brands.

“Lordstown Motors Corp. filed for bankruptcy June 27, with plans to restructure its business and seek a buyer, according to a company release. The electric vehicle manufacturer’s assets include its Endurance pickup truck and related resources,” S&P noted in the July 6 report.

“Instant Brands Acquisition Holdings Inc. also sought bankruptcy protection on June 12. The tightening of credit terms and higher interest rates had impacted the company’s liquidity levels, according to an official release. The company has also already secured $132.5 million from existing lenders and plans to continue discussions with its financial stakeholders.”

Year-to-date through June, 15 companies with more than $1 billion in liabilities filed for bankruptcy, such as Cyxtera Technologies, Diebold Holding, Bed Bath & Beyond, Diamond Sports Group, and Party City.

The Lordstown Motors Baja truck is displayed during a media tour of the company's complex in Lordstown, Ohio, on June 22, 2021. David Dermer, File/ AP Photo

Epiq Bankruptcy, a U.S. bankruptcy filing data provider, confirmed that 2,973 total commercial Chapter 11 bankruptcies were filed in the first half of the year, up 68 percent from the same period in 2022.

Higher Interest Rates Affect Businesses

Banking experts point to higher interest rates as the leading cause of the increase in corporate bankruptcies. Many businesses either maintain vast debt loans that will require refinancing or need more liquidity to stay afloat.

“The increase in commercial and individual bankruptcy filings during the first half of 2023 underscores the economic challenges faced by businesses and individuals,” Gregg Morin, vice president of business development and revenue at Epiq Bankruptcy, said in the report. “Our objective is to provide bankruptcy professionals with timely and accurate data necessary for analyzing stakeholder volumes and trends for making informed business decisions.”

The situation could be exacerbated should the Federal Reserve pull the trigger on two more rate increases this year. The futures market is penciling in a quarter-point boost to the benchmark fed funds rate at this month’s Federal Open Market Committee (FOMC) policy meeting.

According to a recent Fitch Ratings report, 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. The updated projections reflected “the tighter lending conditions and capital access resulting from stress in the banking sector and inflation uncertainty.”

However, some argue that corporate bond market indicators are “less ominous.”

“The interest rate differentials, or spreads, between the 10-year U.S. Treasury note and investment grade (IG) and high yield (HY) corporate bonds continue to hover within their average width over the past 25 years, a bond market signal indicating the likelihood of a less severe recession, with traders pricing in fewer corporate defaults,” John Lynch, chief investment officer at Comerica Wealth Management, wrote in a research note.

Economists contend that the worst corporate bankruptcies typically occur one or two years into a recession. Today, they’re happening before the official start of an economic downturn as the U.S. economy is still expanding.

What’s happening?

“Simple,” said Pete St. Onge, a Heritage Foundation economist, “banks aren’t lending.

“Banks are battening down the hatches, hogging their bailout money instead of lending it out,” he said 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.”

Since the Fed launched the Bank Term Funding Program (BTFP) following the Silicon Valley Bank collapse in March, financial institutions have kept tapping into these emergency lending facilities. After hitting a record high at above $103 billion at the end of June, the latest central bank H.4.1 data show that the BTFP fell for the first time since the beginning of May.

Despite financial entities receiving these funds, companies say it’s becoming more challenging to apply for credit, resulting in what many perceive to be a credit crunch.

A recent Goldman Sachs survey found that three-quarters of small-business owners say they’re worried about accessing capital as banking stress has forced the sector to tighten lending.

A recent National Federation of Independent Business Small Business Survey found that more small-business owners reported that it was harder to access credit than in a previous survey.