In 2023, corporate bankruptcy filings are predicted to increase
Funding that kept many struggling companies afloat during the pandemic has ended, and further speculation is fueled by ongoing global supply chain issues, rising inflation, and an impending recession. Against this backdrop of uncertainty looms a massive wall of corporate debt, with more than $200 billion worth of high yield bonds due in 2023 alone.
This ‘perfect storm’ of macroeconomic conditions, which has ravaged markets for the last month, is on Corporate America’s doorstep and will decimate their already tenuous global supply chains. While bankruptcy does not necessarily result in a company closing, it weakens its financial resilience, especially in volatile economic times.
How Did We Get Here?
In the early months of the pandemic, businesses struggled to keep their lights on and workers employed. In June 2020, the Biden administration launched the Paycheck Protection Program (PPP) which granted nearly $800 billion in low-interest loans to small businesses. Almost a year later, PPP funds were nearly depleted, raising questions regarding businesses’ ability to survive without them.
The start of 2022 was marked by corporations desperately looking for new sources of funding. In addition to this, supply chains continued to struggle with manufacturing delays, trucker shortages, and lack of workers. As corporate stability decreased, bankruptcy numbers started to rise:
|January – June 2022||Of companies declaring bankruptcy, 60% were private|
|January – August 2022||Tech companies lay off 32,000 employees|
|February – March 2022||Chapter 11 bankruptcy filings increase 38%|
|June 2022||The busiest month for large bankruptcy filings since March 2021|
Let’s Look at a Real-World Example
Despite 90 successful years in the cosmetics industry, Revlon’s substantial debt load, a chaotic supply chain and shifting consumer patterns due celebrity competition, all proved to be challenges they couldn’t overcome. Additionally, vendors who had outstanding invoices requested upfront payments or payments on the outstanding amount to combat the spike in raw materials prices.
To put it into perspective, Revlon lipstick requires 35 to 40 raw materials per tube. In the face of these high demands, Revlon struggled to maintain its products and sales.
As of late March 2022, Revlon’s long-term debt totaled $3.31 billion. Nearly two months later, the company filed for Chapter 11 bankruptcy. The company’s market value was $100 million, far below its soaring debt totals. The company’s financial woes continued later into 2022. In October, the New York Stock Exchange delisted Revlon from trading, and the very next day, the company’s shares lost half their value.
Revlon’s bankruptcy perfectly illustrates that right now, that perfect macroeconomic storm is wreaking havoc and causing major disrupting to supply chains. Not next year or in six months, but now. With medium-term fundamentals that look almost as bad as their short-term outlook, they were a classic example of a company that has been able to kick its debt can down the road because of a historically accommodative credit market.
Companies, particularly in retail which has high exposure to distress, must take immediate action to evaluate the financial health of their third parties, whether it be in their supply chains or elsewhere.
Where We’re Headed
Revlon’s COVID-19 downfall is only one example of supply chain disruptions’ catastrophic impact. From extreme weather to limited inventory, disruptions will continue challenging corporations.
In the first half of 2022, 60% of bankruptcy filings came from private companies. That’s a startling statistic when you consider that small private companies account for a large percentage of most supply chains. It won’t be long until businesses feel the ripples of disruption through their supply chain as these companies begin to struggle.
Suppliers with poor financial health are almost 3X more likely to provide very poor delivery performance, but corporations don’t have to sit idly by as bankruptcy lurks in shadows of their supply chains. Now’s the time to be proactive.
You’ve invested heavily in building a specialized supply chain that provides your business with the components that make it unique and differentiated in the market. Let RapidRatings help you protect it. We give you full transparency on your suppliers’ financial health and resiliency, so you know which suppliers can handle operational strains, and which suppliers will be impacted by disruptions, like a bankruptcy.
Learn more about the rise of corporate bankruptcies and its impact on supply chains.
- Large Chapter 11 Bankruptcies Maintain Sleepy Pace in First Half (cfo.com)
- Tech Layoffs: US Startups And Tech Companies With Job Cuts In 2022 (crunchbase.com)
- Bankruptcy filings are creeping back up in early 2022 | Reuters
- US Bankruptcy Tracker: June on Track for Busiest Month of Year (bloombergtax.com)