The Corporate Bankruptcy Wave Will Get Even Uglier

Business bankruptcies are surging around the world, in some countries reaching volumes not seen since the aftermath of the 2008 financial crisis. It’s likely just the start of a wave of corporate defaults: A decade of cheap money instilled a false sense of invincibility in business executives and private equity managers who forgot that bust normally follows boom. Now, a combination of weakening demand, surging inflation, over-indebted balance sheets, and much higher borrowing costs will prove too much for weaker borrowers.

US bankruptcies in the first six months of 2023 were the highest since 2010 among the companies covered by S&P Global Market Intelligence. In England and Wales, corporate insolvencies are near a 14-year high. Swedish bankruptcies are the highest in a decade, while in Germany bankruptcies jumped almost 50% year-on-year in June to the highest level since 2016. In Japan, bankruptcies are at their highest in five years.

Bankruptcy Surge | US business failures are piling up at the fastest pace since 2010 by this one measure

Insolvencies normally spike once a recession is already underway, but businesses are collapsing even as labor markets and corporate profits show surprising resilience. One explanation: Generous government financial aid programs during the pandemic and a relaxation of the rules for when companies must file for bankruptcy led to an unusual hiatus in corporate failures in 2020-2021.

In many cases, this forbearance postponed rather than prevented a financial reckoning. Flawed business models, over-leveraged capital compositions, and structurally challenged industries are ill-placed to cope with a surge in interest rates. “Cheap money enabled a lot of cans to be kicked down the road,” says Robin Knight, a partner at advisory firm AlixPartners. “All of a sudden, the defining characteristic of bankruptcy — running out of money — is relevant again, and the fundamentals of the underlying business are more important than ever.”

Running Out of Cash | Corporate insolvencies in England and Wales are 18% higher than one year ago and are near the most since 2009