Is there investment potential in skyrocketing bankruptcies?

Corporate bankruptcies and defaults are witnessing an unprecedented surge in the United States. Corporate defaults have jumped to 41, which is over twice as many as the same period in 2022. Moody’s Investor Services corroborates this data, painting a grim picture of a corporate landscape where companies are struggling to cope with uncertain economic conditions and burgeoning debt loads.

This rise in corporate default rates has been fuelled by high interest rates, making refinancing significantly more challenging. The debt has become more expensive, causing corporations to falter under the load. This rise is a clear symptom of a distressed economy grappling with challenges on multiple fronts.

In addition to the spike in corporate defaults, bankruptcy filings in the U.S. have also seen a sharp uptick, reaching levels not witnessed since 2010. With the Federal Reserve planning to continue hiking interest rates to curb inflation, this trend shows no sign of reversing in the upcoming months.

The Federal Reserve’s Chairman, Jerome Powell, has warned of further interest rate increases this year, albeit at a slower rate, until more substantial progress can be made in reducing inflation. This continues to place pressure on businesses across industries.

The major casualty of these circumstances is liquidity. Companies already burdened with sizable debt loads face a mounting cost of new debt. Common solutions involve distressed exchanges – swapping debt for a different form or repurchasing it. In more severe cases, a restructuring might occur either in or out of court.

Through June 22, there have been 324 bankruptcy filings, not far behind the total of 374 in 2022, per data from S&P Global Market Intelligence. Several prominent names have succumbed to this financial distress, including Envision Healthcare, Monitronics International, Silicon Valley Bank, Bed Bath & Beyond, and Diamond Sports.

According to Moody’s, the global default rate is predicted to reach 4.6% by the end of the year, outpacing the long-term average of 4.1%. This rate is further projected to escalate to 5% by April 2024 before finally starting to recede. These defaults are often months or quarters in the making. They are often the result of an extended period of economic distress and failed attempts to resolve balance sheet issues.

Until now, we have been in an environment of incredibly lax credit. This means that even companies that shouldn’t be tapping into debt markets have been able to do so without restrictions. This has led to defaults across a wide range of industries when the rates increased.

Sector-specific reasons also have played a role. Envision was adversely affected by health-care issues emanating from the pandemic, Bed Bath & Beyond suffered due to its large store footprint amid a surge in online shopping, and Diamond Sports was hampered by consumers moving away from cable TV packages.

With an uncertain economic climate marked by weakening growth, high interest rates, and rampant inflation, the stage is set for more defaults. Cyclical sectors, such as durable consumer goods, may be particularly vulnerable if consumers pull back on spending.

The surge in bankruptcies and defaults is indeed a wake-up call for corporations to rethink their business models and prepare for a potentially rocky economic landscape.

This challenging landscape might necessitate a change in investment strategy, but it should not be mistaken for a reason to shy away. Instead, investors are presented with a market environment that requires a deeper understanding of individual sectors and companies. While healthcare, retail, and media sectors have seen significant defaults, astute investors may find compelling investment opportunities within these sectors as market corrections could unveil undervalued stocks.

Additionally, the trend of rising corporate defaults might lead to a broader market correction, providing investors with an opportunity to buy stocks at lower prices. As Warren Buffet once said, “Be fearful when others are greedy and greedy when others are fearful.” As such, cash-rich investors might find themselves in a beneficial position, ready to capitalise on market dislocations.

The current situation could present chances for growth investors too. Certain resilient companies and sectors may thrive amidst economic uncertainties. These are the ones with strong balance sheets, sustainable business models, and the ability to adapt and innovate under pressure. They can weather economic downturns, potentially offering attractive growth prospects for investors.

The prevailing economic conditions, while presenting certain challenges, undeniably offer an abundance of opportunities for investors with a keen eye for value and resilience. 


Ivailo Chaushev,

Chief Market Analyst at Deltastock


Risk warning:

This article is for information purposes only. It does not post a buy or sell recommendation for any of the financial instruments herein analysed. 

Deltastock AD assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon the information on this page. 

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