As high interest rates and weak consumer demand impact struggling businesses, the bankruptcy rate of USA companies has reached the highest level since the Global financial crisis.

According to data from S&P Global Market Intelligence, at least 686 USA companies filed for bankruptcy in 2024, an increase of about 8% from 2023, making it the highest number since 2010 (828 companies).

According to Fitch Ratings, the number of companies seeking to avoid bankruptcy through out-of-court restructuring has also increased, with a ratio of about 2:1 compared to the number of bankrupt companies. Therefore, priority lenders of issuers with total debts of at least 0.1 billion USD have experienced the lowest recovery rates since at least 2016.

The bankruptcy of party supplies retailer Party City is a typical example of failed businesses in 2024. In late December last year, the company filed its second bankruptcy petition in two years, having exited Chapter 11 bankruptcy protection in October 2023.

Party City stated that after struggling in the "difficult circumstances caused by factors like costs and consumer spending," it will close its 700 stores nationwide.

As the stimulus measures during the COVID-19 pandemic wane, weak consumer demand has severely affected companies reliant on discretionary consumer spending. Other major companies that went bankrupt last year included food storage manufacturer Tupperware Brands, chain restaurant Red Lobster, Spirit Airlines, and cosmetic retailer Avon Products.

Gregory Daco, chief economist at EY, stated: "The continued rise in the cost of commodities and services is putting pressure on consumer demand." The burden is particularly heavy for low-income households, "but even among middle-income and higher-income households, there is an increasing sense of caution."

As the Federal Reserve begins to cut interest rates, the pressure on businesses and consumers has eased somewhat, but officials have indicated they only plan to cut an additional 50 basis points in 2025.

Peter Tchir, Macro Strategy Director at Academy Securities, stated that there are still some easing factors present, including the relatively low spread between high-risk corporate ​Bonds and government ​Bonds.

"Clearly, (the rise in corporate bankruptcy rates) is not a good thing. However, I haven't yet seen any risks that would create a chain reaction impacting the broader economy or the banking system," Tchir said.

In the USA, companies only filed 777 bankruptcy applications cumulatively in 2021 and 2022, when funding costs were much lower due to the Federal Reserve's interest rate cut plans.

This number jumped to 636 in 2023, continuing to rise last year, despite the Federal Reserve starting to cut interest rates at the end of 2024. According to Standard & Poor's data, at least 30 of the companies that filed for bankruptcy last year had debts of at least 1 billion dollars at the time of filing.

Historically, the number of bankrupt companies usually aligns with the number of companies undergoing out-of-court restructurings to reduce bankruptcy risks.

Joshua Clark, Senior Director at Fitch Ratings, stated that these moves, euphemistically referred to as debt management, have become increasingly common and have accounted for a large share of corporate debt defaults in the USA in recent years, a trend that will continue into 2024.

These debt management strategies are often seen as a last resort to avoid seeking court protection. However, in many cases, if companies cannot resolve their operational difficulties, they ultimately end up bankrupt.

Clark added that this debt restructuring may have negative impacts on the lenders, as they would be adding more debt on top of the existing debt.

Editor/ping