- Corporate bankruptcy filings have surged so far this year, already eclipsing the number of bankruptcies in 2022.
- The spike comes as interest rates continue to move higher, with the 10-year US Treasury rate above 4%.
- But there are three reasons why bankruptcy filings aren’t as scary as they sound, according to Carson Group.
Corporate bankruptcies have surged this year to the highest level since 2010, but it’s not as scary as it might sound, according to Carson Group global macro strategist Sonu Varghese.
So far this year, there have been 402 corporate bankruptcy filings, which is almost double the number seen in all of 2022. Some well-known companies that have gone under this year include Bed Bath & Beyond, Yellow, Silicon Valley Bank, and Party City.
Part of the financial hurt for these companies has been the end of near-zero interest rates. The spike in borrowing costs has made it more difficult and cost prohibitive for struggling companies to raise debt. On Thursday, the 10-year US Treasury yield hit the highest level since 2007.
But according to Varghese, there are three reasons why investors shouldn’t panic about the recent uptick in bankruptcy filings.
1. The bond market is not concerned.
The bond market would typically be the first to freak out about bankruptcies as failing companies that file for bankruptcy are often on the verge of defaulting on their debt.
But bond investors — even those who buy below-investment-grade debt — have not shown signs of worry.
Varghese looked at bond yield spreads for junk bonds relative to safe US Treasurys. When the bond market is worried about bankruptcies and defaults, the spread often surges. But that the spread is currently at 3.8%, which is in the 28th percentile across data going back to 1997, and lower than the average spread of 5.4%.
“The current spread is also below what we saw last June, which is when the Federal Reserve signaled they were going to get a lot more aggressive… the current level remains well below what we’ve seen ahead of prior crises, including in 2000 and late 2007,” Varghese said in a note earlier this week.
“Bond investors typically sniff out hard economic times for companies well ahead of other investors. And right now, they don’t see any signs of that,” he added.
2. Banks are not ringing the alarm.
Given that the entire business model for banks revolves around lending companies money and then getting paid back interest and principal, it’s no surprise that banks’ main goal is to limit their default rate and avoid lending to companies that are on the road to bankruptcy.
Right now, delinquency rates on business loans have actually been falling, not rising, even as bankruptcies tick up.
The delinquency rate on business loans for all commercial banks was under 1% in the first quarter, which is below the 1.1% level seen just before the pandemic. Historically, business loan delinquency rates have averaged at 2.7% outside of recessions, according to Varghese.
3. Entrepreneurship is on the rise.
While bankruptcy filings rise, so too are entrepreneurship and the formation of small businesses.
In the first half of the year, there were more than 293,000 business applications that included “planned wages,” which indicates that the business will likely have a payroll. That number is up 2% year over year and up more than 21% compared to the first half of 2019.
“Entrepreneurship kicked into overdrive after the pandemic, as people ended up with more money in their pockets… applications jumped in 2020 and 2021 to an average of 582,000 a year, which was a 17% increase from the average we saw in the previous decade. And the good news is that we didn’t see a huge falloff in 2022 despite aggressive rate hikes by the Fed,” Varghese said.