Large U.S. corporate bankruptcies had a very slow first half. But the pace of filings could pick up the rest of the year as higher interest rates, inflation, a global recession, and a likely growing inability to pass through higher costs eat away at margins and cash flows.
Such a scenario has been predicted before, but this time there's evidence to back it up.
Only 20 U.S. companies filed Chapter 11 in the first six months of 2022 (among companies with over $100 million in assets), the lowest midyear total since 2014, according to data released Wednesday by Cornerstone Research. The total was also less than half the number recorded in the first half of 2021 (43) and one-quarter of the 89 filings made in the first half of 2020.
Private company bankruptcies constituted 60% of all filings in the first half, up from the yearly average of 40% in the 2005 to 2021 period.
“U.S. government stimulus programs, low borrowing rates, and high debt forbearance helped disrupt predictions of continued growth in the number of bankruptcy filings,” said Nick Yavorsky, a report co-author and Cornerstone Research principal.
"Mega" Chapter 11s (over $1 billion in assets) were also scarce in the first half, with only four filed, below the 2005-2021 half-year average of 11. The largest bankruptcy was the $10 billion-asset Talen Energy Supply in May. The power generation and infrastructure firm announced last week it was soliciting bids for a sale of the company in parallel with its ongoing financial restructuring.
An industry which bucked the overall downtrend was finance, insurance, and real estate. It saw 10 bankruptcies in 2020, 15 in 2021, and six as of June 30.
Struggling shopping centers and hotels and "changes in consumer and worker behavior" are challenging real estate investment, wrote the report's authors, and "signs of a potential global recession and high inflation have increased concerns for cryptocurrency and financial firms."
Other industries may soon follow suit.
Not considering company assets, commercial Chapter 11 filings rose in August, according to data from Epiq Bankruptcy. Chapter 11 filings increased to 466, compared with 257 registered the previous month.
Overall commercial bankruptcy filings of 1,861 were an increase of 6% compared with August 2021.
Small and midsize businesses tend not to have the access to capital markets and restructuring options that bigger companies do, making it harder for them to avoid insolvency.
So far, notable Chapter 11 bankruptcy filings in the second half include NewAge, a direct-to-consumer organic and healthy products company; cryptocurrency firm Voyager Digital; ExpressJet airlines; auto supplier Gissing North America; Packable Holdings, a Carlyle Group-backed e-commerce platform; Lumileds Holding B.V., a supplier of LED lighting for automotive displays; Scandinavian Airlines System (SAS); and London-listed Cineworld, the owner of movie theater chains including Regal Cinemas.
In its third-quarter "base case" forecast for the third quarter, Fitch Ratings said airlines, homebuilders, and building products companies were most exposed to risks such as demand erosion, raw materials or commodity inflation, and the inability to pass through price increases.
Any signs of faster than expected operating expense growth/margin pressure and weakening liquidity profiles could also pressure airlines' credit ratings, Fitch said.
This story was updated on Sept. 7 at 5:26 p.m. EDT to reflect the Chapter 11 filing of Cineworld.