Bankruptcies On The Rise Following End Of COVID Relief Measures And High-Interest Rates

Corporate bankruptcies have seen a sharp increase in the last year as interest rates rose and following the withdrawal of trillions of dollars worth of COVID-19 support packages.

U.S. court data showed that Chapter 11 filings rose by 30% in the year to September compared to the same period a year ago. This followed a decade of declines in bankruptcies. Back in June, Bank of America noted there had been 236 corporate bankruptcies in the U.S. between January and April — double the previous year’s rate for the same period.

The rise in interest rates, combined with the unwinding of pandemic-era government support programs, have fueled the rise in the insolvency rate, leading to the collapse of so-called zombie companies — highly indebted firms that are no longer able to repay their loans without additional funding.

Industries At Risk

Industries most at risk appear to be in the hospitality and transportation sectors, where high energy costs added to the strain, while small banks could come under further pressure as zombie companies — which have been able to service interest requirements on their debt — become unable to pay back the principal loans.

In March this year, the collapse of Silicon Valley Bank sent shockwaves through the financial sector. The SPDR S&P Regional Banking ETF KRE, an exchange-traded fund that tracks the performance of U.S. regional banks, lost nearly a third of its value in the six weeks following the SVB collapse.

Also Read: Why Silicon Valley Bank Collapsed: A Simple Explainer

In November, office space rental company WeWork began its process of filing for Chapter 11 bankruptcy. It was a victim, not only of high interest rates and the withdrawal of stimulus, but of changing working practices following the pandemic as increasing numbers of office workers chose to work from home.

It is now trading as a penny stock having been worth more than $500 a share little over two years ago. The Vanguard Real Estate ETF VNQ fell 1.4% on Friday, but was up 0.6% in pre-market trade on Monday.

Could Insolvency Rate Rise As Economic Clouds Darken?

Companies were able to weather the sharp fall off in business activity during the pandemic thanks to government support packages worth a total of $5.8 trillion — representing nearly a third of U.S. gross domestic product.

Since the end of 2021 these programs have been largely withdrawn and coincided with rising inflation rates that required the Federal Reserve to hike interest rates up to 5.25%-5.5%.

The biggest concern now is that, under current conditions, with business activity showing signs of slowdown, the insolvency rate could continue rising, putting further jobs at risk and having longer-term consequences for economic growth.

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