2023 has been a year for bankruptcy
Corporate bankruptcy filings in the U.S. this year are on track to hit their highest rate in over a decade, according to S&P Global Market Intelligence. More than 230 companies declared bankruptcy between the beginning of the year and the end of April.
The story of the great bankruptcy boom of 2023 goes back more than a decade, when the Federal Reserve’s benchmark interest rate was next to nothing.
When interest rates are low, “more people take advantage of the more available credit to borrow money on good terms,” said Kevin Kaiser, a finance professor at Wharton. “People seem flush and everybody seems good about it.”
Seems good is the operative part there. But quietly, companies in trouble are borrowing to cover their debt, which is enough to get by until inflation comes along.
“Rates rise, access goes down and some people default,” Kaiser said.
Some bankruptcy churn is normal, Kaiser added. This is corporate America, after all, and in corporate America, companies fail.
What’s unique about this group is that so-called consumer discretionary companies are leading the filings. That includes stores like David’s Bridal, Party City and Bed Bath & Beyond, which fell behind just as online shopping upended retail, pointed out Jaime Katz, an analyst at Morningstar.
“If you are not fast enough to convert your model to whatever the next big consumer trend is, you ultimately fall out of favor,” she said.
It’s why retailers are less likely to make it out of bankruptcy, though most companies in other sectors do eventually recover.
Jared Ellias, who teaches corporate bankruptcy law at Harvard, thinks more companies will enter bankruptcy this year. And he’s worried it’ll cause a domino effect.
“A company files, they don’t pay people they owe money to, and then the people who don’t get paid don’t pay the people they owe money to,” he said.
Ellias doesn’t know how serious the problem is yet. It looks like it’ll go one of two ways: “What we’re seeing is a bunch of companies with problems or you’re seeing indicators that corporate America as a whole is having problems.”
What’s that Warren Buffett quote? You only learn who has been swimming naked when the tide goes out.
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