Corporate Defaults Jump: Interest Rates and an Uncertain Economy May Be to Blame

High interest rates paired with an uncertain economic outlook may be driving a climbing corporate default rate, CNBC reported.

There have been 41 defaults in the U.S. and one in Canada to date in 2023 — the most worldwide of any region and more than double the same period last year, according to data from Moody’s Investors Service.

And companies appear unable to catch a break. This week, Federal Reserve Bank Chair Jerome Powell said more interest rate hikes are to be expected this year as the central bank tries to tackle inflation. The Fed has raised interest rates 10 times since March 2022, keeping them steady this month at 5%-5.25%.

High interest rates make it more difficult for companies to refinance their debt.

But defaults may not necessarily be an indicator of current economic conditions, with many of them being several months in the making.

“The default rate is a lagging indicator of distress,” Tero Jänne, co-head of capital transformation and debt advisory at Solomon Partners, told CNBC. “A lot of times those defaults don’t occur until well past a number of initiatives to address the balance sheet, and it’s not until a bankruptcy you see that capital D default come into play.”

There has also been a spike in bankruptcy filings. There were 324 bankruptcy filings through June 22, inching closer to last year’s total of 374, according to S&P Global Market Intelligence data. By April of this year, there had been more than 230 bankruptcy filings, the highest rate in the period in 13 years.

Envision Healthcare, Silicon Valley Bank and Bed Bath & Beyond are among the largest corporations to file for bankruptcy this  year. As The Messenger reported on June 13, the online discount-home-goods seller Overstock has entered a bid of $21.5 million to buy some Bed Bath & Beyond assets.