American businesses go bankrupt en masse, the biggest culprit is revealed

The rate of corporate defaults in the US rose in May 2023 - a sign that these companies are struggling with higher interest rates, making refinancing more expensive.

American businesses are forced to make painful choices. (Source: Getty Images)

There have been 41 corporate defaults in the U.S. and one in Canada so far this year, the most of any region globally and more than double the number for the same period in 2022, according to Moody's Investors Service.

At a hearing before the US House Financial Services Committee recently, a week after the US Federal Reserve (Fed) decided to temporarily suspend interest rate hikes, Chairman Jerome Powell affirmed that the move could only be a short "break" and not a sign that the bank has completed its interest rate hike roadmap.

He expects more rate hikes this year, including at a slower pace, until more progress is made in the fight against inflation.

According to bank managers and analysts, high interest rates are the biggest culprit leading to the current difficult situation of businesses.

Companies that need more liquidity or those that already have huge debt that needs to be refinanced are facing rising costs of new debt.

Painful choices are made. Businesses choose to swap their debt for another form of debt or buy back the debt. In extreme cases, restructuring can take place in or out of court.

“Capital is much more expensive now,” said Mohsin Meghji, founding partner of advisory and restructuring firm M3 Partners. “Look at the cost of debt. You could reasonably borrow at an average of 4% to 6% at any point in the last 15 years. Now the cost of borrowing has gone from 9% to 13%.”

Mr. Meghji also said that his company has been particularly busy advising businesses in various sectors since the fourth quarter of 2022.

S&P Global Market Intelligence revealed that from the beginning of the year to June 22, the US recorded 324 bankruptcy filings, nearly equal to the 374 for the whole of 2022. As of April 2023, more than 230 bankruptcy filings had been filed, the highest level for the same period since 2010.

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