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US corporate bankruptcies are at their highest levels since the global financial crisis, as rising interest rates and weak consumer demand punish struggling groups.
At least 686 US companies have applied for it Bankruptcy in 2024, up about 8 percent from 2023 and higher than in any year since 828 applications were filed in 2010, according to data from S&P Global Market Intelligence.
Out-of-court maneuvers seeking to avoid bankruptcy also increased last year, with bankruptcies outnumbering bankruptcies by about two to one, according to Fitch Ratings. As a result, priority lenders to issuers with at least $100 million in total debt saw their lowest recovery rates since at least 2016.
The collapse of party supplies retailer Party City was a model for corporate failure in 2024. In late December, it filed for its second bankruptcy in as many years, after emerging from Chapter 11 proceedings in October 2023.
Party City said it would close its 700 stores across the country after experiencing difficulties “in an extremely difficult environment driven by inflationary pressures on costs and consumer spending, among other factors”.
Consumer demand has waned as stimulus from the Covid-19 pandemic has tapered off, hitting businesses that rely on discretionary consumer spending particularly hard. Other major bankruptcies last year included a food storage manufacturer TupperwareRestaurant chains Red Lobster and Spirit Airlines and cosmetics retailer Avon Products.
“The continuing high cost of goods and services is weighing on consumer demand,” said Gregory Daco, chief economist at EY. The burden is particularly heavy on households on the lower end of the income spectrum, “but even at the middle and upper level, you see more caution.”
Pressures on businesses and consumers have eased somewhat as the Federal Reserve has begun lowering interest rates, although officials have indicated they intend to lower them by only half a percentage point in 2025.
There are mitigating factors, including the relatively low spread between riskier corporate borrowing rates and government debt, said Peter Chair, head of macro strategy at the Academy of Securities.
“Obviously it's not great for this to happen. But when I think about what it could have a knock-on effect on the broader economy or the banking system, that doesn't really get me excited yet,” said Cher.
There were only 777 bankruptcies in 2021 and 2022 combined, when the cost of money was much lower due to the Fed's interest rate cutting program.
That number jumped to 636 in 2023 and continued to rise last year even as interest rates began to fall in late 2024. At least 30 of last year's bankruptcy filers had liabilities worth at least $1 billion at the time of filing, According to the Standard & Poor's index. Data.
Historically, there are generally the same number of bankruptcies that are taken out of court to reduce the likelihood of insolvency.
These types of moves, known as liability management exercises, have become common Increasingly common Joshua Clark, a senior director at Fitch Ratings, said debt has grown to represent a significant portion of US corporate debt defaults in recent years, and this trend will continue in 2024.
These debt maneuvers are often considered a last resort to avoid filing for court protection. However, in many cases, companies end up going bankrupt anyway if they cannot fix their operational problems.
“Maybe their profitability will go up, or interest rates will go down, or a combination of both, in order to avoid bankruptcy,” Clark said, adding that such liability transactions could negatively impact lenders by piling more debt on top of existing debt. Commitments.
Additional reporting by Amelia Pollard
