In recent times, the economic landscape has been shifting, with the Federal Reserve's tightening monetary policy reaching what many believe to be a critical junctureEven as market predictions suggest a possible end to the current cycle of interest rate hikes, the repercussions of already elevated rates are expected to lingerMany businesses still face borrowing costs significantly higher than those seen during the pandemic's most severe phases, creating a challenging environment for corporate financing.

The banking sector in both Europe and the United States has experienced turmoil this year, drawing increasing concern from investorsThe stability of the banking industry remains uncertain, and corporations are starting to grapple with escalating debt challenges

Advertisements

A troubling trend has emerged as more companies find their credit ratings downgraded to "junk" status, facing soaring borrowing costs as a consequence.

According to Bloomberg, the pace of bankruptcies for large enterprises this year ranks as the second-fastest since the financial crisis of 2008, surpassed only by the early days of the COVID-19 pandemicOver $500 billion in corporate debt is looming, with expectations that this figure could continue to escalate.

Wall Street is increasingly anxious about the potential consequences of this wave of corporate insolvency, which may not only contribute to a slowdown in economic growth but also exert fresh pressure on the credit markets that had just begun to show signs of relaxation.

As Moody's reported earlier this month, during the first quarter of this year, there were 33 debt defaults among the global companies it rates, marking the highest level since Q4 2020; notably, 15 of these defaults occurred in March alone.

The impact of the pandemic is evident as in Q4 2020, there were 47 defaults recorded

Advertisements

This year, a persistent and profound economic slowdown not only threatens to plunge companies into default but also poses a risk of triggering widespread bankruptcies.

In Europe, companies already burdened with debt are finding it increasingly difficult to endure the twin pressures of inflation and soaring interest rates.

As Reuters noted, Thames Water, the UK's largest water services provider, has accumulated a staggering debt of £14 billion (approximately $18.3 billion). Should the company fail to secure additional funding, the UK government may have to consider nationalizing it.

Additionally, Casino, France's sixth-largest retailer, is similarly entangled in financial woes and is currently negotiating court protection with creditors

Advertisements

The net debt of Casino stands at €6.4 billion (around $7.2 billion), and in the upcoming two years, the company must offset €3 billion in maturing debt, prompting warnings from both Moody's and Standard & Poor's regarding default risks.

Moreover, one of Sweden's largest property companies, SBB, experienced a credit rating downgrade to "junk" status in May, with liabilities ballooning to 81 billion Swedish Krona (roughly $7.9 billion). This company is now urgently seeking buyers for all or part of its operationsSpanish company Celsa, the largest private steelmaker, faces a mountain of nearly €3 billion (about $3.37 billion) in debt, with creditors having submitted restructuring plans pending court approval.

In the United States, ATM manufacturer Diebold Nixdorf filed for bankruptcy last month, entering proceedings with over $2.7 billion in debt

• Companies Step Up Market Value Management Efforts
• Brokerages Boost Dividend Asset Allocation
• Retail in 2025: No Room for Myths
• The Patent Cliff Showdown of MNCs
• Why is Aux Electric Committed to the IPO Journey?

The effects of rising defaults span industries as diverse as healthcare with Envision Healthcare and media with Vice Media.

It’s worth noting that this wave of defaults is not confined to a single sector; rather, it encompasses a broad spectrum of industriesSharon Ou, a vice president and senior credit officer at Moody's, emphasizes that the frequency of defaults is heavily dependent on leverage and liquidity throughout various sectors.

By the end of June this year, S&P Global reported a total of 324 bankruptcy filings among U.S

companies, a figure only slightly lower than the 374 recorded for all of 2022. The first four months of this year alone saw 236 bankruptcies, the highest number since 2010 and more than double that of the previous year.

On a global scale, similar trends emergeAccording to S&P Global, the number of corporate bankruptcies in England and Wales is nearing a 14-year peak, while Sweden has recorded the highest number of bankruptcies in a decadeJune saw a nearly 50% year-on-year increase in bankruptcies in Germany, reaching levels not seen since 2016. Similarly, Japan has experienced its highest number of bankruptcies in five years.

However, observers caution that we may only be witnessing the beginning of an impending wave of defaults

Bloomberg compiled data indicates that nearly $600 billion in debt trades are deemed at risk of default, with actual defaults occurring at a rate of less than 15%. This unsettling statistic suggests over $500 billion in debt might fall into non-payment or struggle to be serviced adequately.

Moody's anticipates that the default rate for speculative-grade firms worldwide could rise to 5.1% next year, up from 3.8% over the past 12 months concluding JuneIn the worst-case scenario, this rate could soar to 13.7%, eclipsing levels seen during the financial crisis of 2008-2009.

S&P Global similarly forecasts an uptick in default rates for speculative-grade firms in the U.S

and Europe by March 2024, climbing to 4.25% and 3.6%, respectively, from 2.5% and 2.8% noted in March this year.

The underlying reasons for these defaults are not particularly complexBankers and analysts indicate that high interest rates are the main culprit behind these predicamentsCompanies in need of more liquidity face increased financing costs, while those burdened with significant past debts encounter elevated repayment and refinancing expenses.

Worse still, even though there is speculation that the Federal Reserve's current rate-hiking cycle may soon conclude, the heightened rates are unlikely to decline in the immediate future

Corporate borrowing costs continue to hover well above levels recorded during the pandemic.

"Capital is considerably more expensive now," notes Mohsin Meghji, founding partner of restructuring and consulting firm M3 PartnersIn the past 15 years, businesses could reasonably secure debt financing at rates of 4% to 6%; now, however, those costs have escalated to between 9% and 13%.

Such shifts may explain why numerous enterprises are opting to sell assets or seek bankruptcy restructuringAlthough the amount of high-risk debt maturing this year is not overwhelmingly significant, the challenges they will face in refinancing of the future will inevitably intensify

Companies proactively restructuring now can better mitigate potential risks they may encounter.

"The primary wave of debt maturity will occur between 2024 and 2026," advised Navid Mahmoodzadegan, co-founder of independent investment bank Moelis & Co., speaking to investors last month"Unfortunately, many companies may not be able to refinance before their debts come dueHence, I suspect we will see not only a plethora of bankruptcies but also numerous companies pursuing balance sheet restructurings and adjustments to their capital structures."

Yet the pressing concern remains that not all corporations will manage to survive the challenges posed by soaring debt levels, high-interest rates, and rampant inflation