In recent times, a worrying trend has been sweeping through the American business landscape – a surge in bankruptcies among some of the nation’s most recognizable companies.
From retail giants like Bed, Bath & Beyond to media powerhouses like Vice Media, the list of businesses facing financial distress seems to be growing longer by the day. And the danger is whether this is just the beginning of a dragged-out recession.
Looking through all the issues presented, the rising wave of bankruptcies in the US can be attributed to one main reason. Which is poor debt management.
A Debt Dilemma
Companies are grappling with mounting debts, and the situation has been exacerbated by a significant increase in interest rates. Since 2022, global companies have eagerly borrowed over $500 billion of investment-grade debt, primarily burdening US balance sheets.
A growing mountain of debt that has reached alarming proportions.
InteractiveCapitalist shared an article that shows the US debt has been increasing tremendously over the last few years since the pandemic.
With the increase in the ability to borrow debt, many companies in the US started borrowing cheap loans to tide through the turmoil. This, however, leads to bad businesses taking on more debt simply to survive. They are now known as “zombie companies” that are simply alive at that time thanks to cheap debt.
As interest rates rose all around the world to reduce inflation, companies started to feel the pain. Borrowing debt just became more expensive and unprofitable. With prolonged interest rate hikes, companies started collapsing.
Retailers in Turmoil
Retailers, in particular, are bearing the brunt of this financial turmoil. Inflation is driving up their operational costs, even as consumer spending slows. By mid-2023, the consumer industry accounted for more than a fifth of bankruptcy filings. The ripple effect is profound, as more and more companies face liquidation, leading to job losses and impacting communities nationwide.
Real Estate Woes
Another looming concern is the state of commercial real estate. Remote work and the surge in online shopping have translated into rising vacancies across commercial properties. Unlike home mortgages, commercial real estate loans typically have shorter terms, and nearly $1.5 trillion worth of commercial real estate debt is due before 2025. Already, some major real estate firms are defaulting on their properties, particularly affecting downtown central business districts.
Healthcare on the Brink
The healthcare sector is not immune to this crisis either. Private equity’s involvement has made this one of the most distressed industries in the US. Private equity firms acquire healthcare companies with debt, putting pressure on these entities to prioritize profits over community needs and public health. In 2023, private equity owned 30% of the country’s for-profit hospitals, a concerning statistic that could have long-lasting repercussions on healthcare accessibility and quality.
Tech’s Tightening Belt
Even the tech industry, known for its innovation and growth, is feeling the pinch. Many startups rely on cheap financing to fuel their operations, but higher interest rates are making it harder for them to secure funding. Investors are now seeking immediate profitability, which puts pressure on new tech companies. Large tech corporations, in response, are cutting jobs to reduce costs, while smaller startups struggle to stay afloat.
The Role of the Federal Reserve
The Federal Reserve’s role in this crisis is significant. As it aims to combat inflation, it has kept interest rates higher for longer than expected, inadvertently contributing to the rising tide of debt and bankruptcies. While the current situation may not be as dire as the 2008 financial crisis, it still raises concerns about the economic stability and the potential for further fallout.
What Will Happen?
The surge in bankruptcies among US companies is a multifaceted issue with far-reaching implications. Mounting debts, rising interest rates, and sector-specific challenges have converged to create a precarious environment for businesses. As the situation evolves, it remains to be seen how the government and financial institutions will respond to prevent further economic instability.