Inflation, interest rates continue to drive big business bankruptcies

Dive Brief:

• The number of big U.S. companies with more than $100 million assets that filed for either Chapter 7 or Chapter 11 bankruptcy protection in the 12 months ending July 30 rose 8% to 113 compared to the prior 2022-2023 year-over-year period, a volume well above the historical annual average of 79.2 seen between 2005 and 2023, according to a report released this week by consulting firm Cornerstone Research. 
• Those filings included 24 so-called mega bankruptcies of companies with over $1 billion, of which 21 cited rising costs due to inflation and higher interest rates as a factor in their filing, according to Matt Osborn, a principal at Cornerstone. The biggest bankruptcies by asset size included: wood-pellet exporter Enviva ($2.89 billion in assets), radio platform Audacy ($2.79 billion), and crafts retailer Joann ($2.26 billion) in H1, 2024 along with co-working space provider WeWork ($15.1 billion) and drugstore retailer Rite Aid ($7.65 billion) in H2 2023.
• So far there’s little indication that the Federal Reserve’s recent rate cut or the recent easing inflation will be enough to reduce bankruptcy filings in the remainder of the year, Osborn said. “Many companies —  in particular higher levered ones that entered into financing when rates were low —  are facing the maturity of that debt and…in many cases their cost of capital is going to be higher,” Osborn said Friday in an interview. 

Dive Insight:

The report on rising bankruptcies comes as CFOs are still grappling with a mixed economic outlook even after the Federal Reserve’s rate cut last month bolstered some finance chiefs’ views that the economy is on a glide path toward a soft landing, and a stronger-than- expected jobs report Friday that showed September unemployment rate little changed at 4.1%.

In addition to the larger bankruptcies ticking up, bankruptcy data provider Epiq AACER separately on Thursday reported that overall commercial bankruptcy filings rose 20% through September compared to the year-earlier period. 

“As we close out the third quarter in 2024, we continue to see a steady increase in both individual and commercial filings this year to date,” Michel Hunter, vice president of business development at Epiq AACER, said in a statement contained in a release. “The recent devastation from hurricane Helene in the Southeast, current geopolitical conflicts and a potential for large supply chain impacts…will all influence bankruptcy volumes in the months ahead.”

According to the Cornerstone report, the services sector related to healthcare, computers, software and education had the highest share of the large bankruptcy filings at 29% during the period, followed by manufacturing (26%), with a group that included finance, insurance and real estate seeing 17 in the 12-month period compared to 11 in all of 2023. 

Some sectors saw distress ease, including the long-struggling retail industry which saw the total number of large bankruptcies drop to nine in the 12 months period through July, down from 16 in the year-earlier period, according to the report. On the other end of the spectrum, mining, oil and gas bankruptcy filings in the fiscal year ended in July comprised only 3 of the biggest bankruptcies, the same as the year-earlier period but well below the 44 seen when commodity prices spiked in 2020.