US Bankruptcies Hit 14-Year High; High interest rates and persistent inflation destroy companies like Party City, while weakening consumption leaves a trail of collapses
U.S. corporate bankruptcies have reached their highest level since the aftermath of the global financial crisis, as high interest rates and weakening consumer demand penalize struggling companies.
At least 686 U.S. companies have filed for bankruptcy in 2024, an increase of about 8% from 2023 and the highest number since the 828 cases filed in 2010, according to data from S&P Global Market Intelligence.
Out-of-court maneuvers to try to avoid bankruptcy also increased last year, outnumbering bankruptcy filings by about two to one, according to Fitch Ratings. As a result, priority creditors of issuers with at least $100 million in total debt have experienced the lowest recovery rates since at least 2016.
The collapse of party supplies retailer Party City was emblematic of the corporate bankruptcies of 2024. In late December, the company filed its second bankruptcy filing in two years, after emerging from a Chapter 11 process in October 2023.
Party City announced that it will close its 700 stores nationwide after facing “an immensely challenging environment, driven by inflationary pressures on costs and consumer spending, among other factors.”
Consumer demand declined as Covid-19 pandemic stimulus ended, hitting businesses that rely on discretionary consumer spending hard. Other major bankruptcies last year included storage container maker Tupperware, restaurant chain Red Lobster, airline Spirit Airlines and cosmetics retailer Avon Products.
“The persistently high cost of goods and services is weighing on consumer demand,” said Gregory Daco, chief economist at EY. The impact is particularly heavy on low-income families, “but even among the middle class and higher segments, there is more caution”.
Pressure on businesses and consumers has eased somewhat as the Federal Reserve has begun cutting interest rates, although officials have indicated they intend to cut just another half percentage point in 2025.
Peter Tchir, head of macroeconomic strategy at Academy Securities, pointed to mitigating factors, including the relatively low spread between rates on riskier corporate loans and government debt.
“Obviously, this is not great. But when I think about what could actually cause a domino effect on the broader economy or the banking system, it still doesn’t worry me too much,” Tchir said.
There were just 777 bankruptcy filings in 2021 and 2022 combined, when the cost of money was much lower due to the Fed’s rate-cutting program. That number rose to 636 in 2023 and continued to rise last year, even with the rates starting to decline in late 2024. At least 30 of last year’s bankruptcy filings involved liabilities of at least $1 billion at the time of filing, according to S&P data.
Historically, the number of bankruptcies tends to be equivalent to the number of extrajudicial actions to reduce the chances of insolvency.
These types of measures, known euphemistically as liability management exercises, have become increasingly common and have come to account for a large portion of corporate defaults in the U.S. in recent years, a trend that has continued into 2024, according to Joshua Clark, senior director at Fitch Ratings.
These debt maneuvers are often seen as a last resort to avoid a request for court protection. However, in many cases, companies end up going bankrupt anyway if they cannot resolve their operational problems.
“Maybe their profitability will increase, or interest rates will decrease, or a combination of both, to actually avoid bankruptcy,” Clark said, adding that these liability adjustments could negatively impact creditors by piling more debt on top of existing liabilities.
With information from the Financial Times*
Source: https://www.ocafezinho.com/2025/01/07/sombras-da-crise-voltam-a-crescer-com-falencias-em-alta-historica-nos-eua/
