Bankruptcy, a stunning fall, major restructuring.
Debt is piling up.
Companies are filing for bankruptcy now at the fastest rate since 2020.
Bed, Bath & Beyond filed this year.
Party City filed, Vice media, Instant Pot, and Pyrex.
The list really goes on.
And by all accounts, there's more to come.
The stakes are high.
Jobs are on the line. Debt growth. Credit crunch. Ouch.
Debt defaults like this tend to come in cycles like in 2008.
We are in the midst of a serious financial crisis.
On the start of the pandemic,
when Washington stepped in, slashing interest rates
so that companies on the brink could get cheap money.
We saw company after company taking on more and more debt.
All this access to debt
bought companies time, but it also kicked the can down the road.
Nobody knows how long the pain will last.
We are prepared to raise rates further,
if appropriate, and intend to hold policy at a restrictive level.
The record surge in interest rates is at the root of the issue.
Global companies have borrowed more than $500 billion of investment-grade debt
since the Fed's rate hikes began in 2022.
The vast majority of this was heaped onto US balance sheets,
and despite the high borrowing costs, debt continues to grow.
It's really been building over the course of the last year.
Interest rates have increased, cash flows have declined.
By mid-2023, bluechip names saw their borrowing costs rise
by more than double to an average of 5.6%,
while junk-rated companies were paying 8.7%.
With rates potentially staying high for a longer period of time,
we could see a longer cycle that may not necessarily be tied to the macro economy.
The problem is in part that this is a little bit by design.
The Federal Reserve wants to slow down inflation.
Interest rates were kept higher for longer than a lot of economists and people
on Wall Street expected.
This higher rate
environment has created a mountain of distressed debt.
Distressed debt is generally bonds.
They are tradable.
Bonds that originally sold for 100 bucks are selling
for 20 bucks or 15 bucks or five.
There's more than $200 billion of distress debt in the US,
and that's more than the GDP of some European countries.
Since 2021, this sort of debt owed by riskier, less
creditworthy businesses has jumped around 400%.
Retailers are especially vulnerable.
Inflation keeps their costs high, even as consumer spending slows.
By mid-2023, the consumer industry accounted
for more than a fifth of bankruptcy filings.
Most bankruptcies don't occur because you have a business and it loses money.
A business borrows money.
Times get tough, and when it goes to refinance that loan,
the bank says you're not as good a credit as you used to be, or we don't have
as much money to lend as we used to have, or our standards are higher.
The hope in bankruptcy is that the doors are kept open.
Everyone is kept employed.
But we're seeing more and more liquidations,
which basically means that all of the stores need to be shut down.
For consumer-facing companies and those upstream
supplying them, that will impact their businesses.
So you can kind of have this domino effect and that can have huge impacts
on communities and.
Those can be pretty difficult, particularly if they have a lot of space.
Retailers use bankruptcy to get out of leases
without having to pay large sums of money to the landlords.
Which leads us to commercial real estate.
Remote work plus online shopping have helped increase vacancies.
Unlike home loans,
commercial real estate mortgages typically range from 5 to 15 years.
And across the United States, almost 1.5 trillion
worth of commercial real estate debt is due before 2025.
Or already starting to see some major real estate firms default on their buildings.
The big impact for cities is the downtown central business districts.
Another potential victim of mounting debt is health care,
one of the most distressed industries in the US, in part because the sector's
relative stability made it so attractive to private equity.
Private equity goes in and buys these companies with debt, in part
because they don't have to put up their own cash for it.
They can basically transfer the debt to the company, but as a result,
the company needs to be making enough profit not just to pay off that debt,
but also to have enough returns and lucrative returns for those investors.
As of 2023, private equity owns 30% of the country's for profit hospitals,
which means these hospitals are forced to prioritize achieving sustainable profits
instead of just focusing on community needs and public health.
The tech industry has its own pressures, mainly
because most startups are unprofitable and depend on cheap financing.
The appetite for risk has declined a bit.
There is less capital available to companies, particularly those
that are growing.
Higher rates make these new tech companies less attractive
because investors want to see proof of profits immediately.
Big companies respond by cutting jobs to reduce costs.
Small companies struggle to raise funding.
Typically, when a tech company goes bankrupt, it's a product failure.
It's a technology or an idea failure.
You know, it just kind of goes poof.
Playing into the consolidation of tech and some other industries is the collapse
of local lenders, like Silicon Valley Bank Signature and First Republic.
All were seized by the FDIC and had their assets sold off
and their demise reduced credit availability.
A daily battle is
being waged in supermarkets and all over this country.
From the postwar economic boom in the 1950s
to its high point in the ‘80s,
interest rates have always fluctuated with the times,
but the near-zero rates of the last 15 years
following the great financial crisis have hardly been the norm.
The financial crisis was obviously unique in and of itself.
This time around, banks are much healthier.
When it's difficult to raise money.
Clearly, many more companies are going to founder.
Fortunately for companies on the brink, this time, the fall doesn't seem quite
so far.
It's definitely not as dire as 2008.
It's not even on the same scale.
The problem is when companies aren't put off by higher rates
and keep borrowing, it may be a sign that the Fed still has more work to do
to bring down inflation, which increases the odds that someone
will get caught offsides and left to take the hit.