Under the impact of high interest rates, the bankruptcy rate of US companies rose to the highest since the financial crisis

As high interest rates and weak consumer demand hit troubled businesses, the US corporate bankruptcy rate has reached its highest level since the global financial crisis.

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

According to Fitch Ratings (Fitch Ratings), the number of companies seeking out-of-court restructuring to avoid bankruptcy also increased last year, with a ratio of about 2:1 to the number of companies that went bankrupt. As a result, preferred lenders of issuers with total debt of at least $100 million experienced the lowest recovery rates since at least 2016.

The collapse of party supplies retailer Party City is a typical example of a failed business in 2024. In late December of last year, the company filed for bankruptcy for the second time in two years, after getting out of bankruptcy protection under Chapter 11 of the Bankruptcy Code in October 2023.

Party City said it would close 700 of its stores across the US after struggling “amid difficulties caused by factors such as costs and consumer spending.”

As stimulus measures subsided during the COVID-19 pandemic, consumer demand weakened, which hit companies that relied on freedom to dispose of consumer spending particularly hard. Other major companies that went bankrupt last year include food storage manufacturer Tupperware (Tupperware), restaurant chain Red Lobster (Red Lobster), Spirit Airlines (Spirit Airlines), and cosmetics retailer Avon Products (Avon Products).

Gregory Daco (Gregory Daco), chief economist at EY (EY), said: “The continuing rise in the cost of goods and services is putting pressure on consumer demand.” The burden is particularly heavy for low-income families, “but even among middle- and higher-income families, there is a growing sense of caution.”

As the Federal Reserve began cutting interest rates, the pressure on businesses and consumers eased somewhat, but officials said they only plan to cut interest rates by an additional 50 basis points in 2025.

Peter Tchir (Peter Tchir), head of macro strategy at Academy Securities, said that there are still some mitigating factors, including relatively low interest spreads between riskier corporate bonds and government bonds.

“Obviously [the rise in corporate bankruptcy rates] is not a good thing. But I haven't seen the risk of a real ripple effect on the wider economy or banking system,” Tchir said.

US companies only filed 777 bankruptcy filings in 2021 and 2022. At that time, due to the Federal Reserve's interest rate cut plan, capital costs were much lower.

This number jumped to 636 in 2023, and continued to rise last year, even though the Federal Reserve began cutting 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 US dollars when filing for bankruptcy.

Historically, the number of businesses that have gone bankrupt has generally matched the number of businesses that have been restructured out of court to reduce the chance of going bankrupt.

Joshua Clark (Joshua Clark), senior director of Fitch Ratings (Fitch Ratings), said such initiatives, euphemistically called debt management, have become increasingly common and have accounted for a large share of US corporate debt defaults in recent years, and this trend will continue in 2024.

These debt management strategies are generally considered a last resort to avoid applying for court protection. However, in many cases, businesses end up bankrupt if they are unable to resolve their operational woes.

Clark added that this debt restructuring could have a negative impact on lenders as they add more debt to existing debt.