In the time since our 2022 blog post, Commercial Bankruptcies May Come Back With a Vengeance in 2023, our prediction has become a stark reality. We have seen closures of former industry titans, such as Bed Bath & Beyond, and an ongoing banking crisis that resulted in three bank failures: Silicon Valley Bank, Signature Bank, and First Republic.
The latest data shows that this problem is not going away. In fact, there has been a significant uptick in corporate bankruptcies and financial distress across all industries:
- In March 2023, Chapter 11 filings rose a staggering 79% YoY.
- Corporate bankruptcies hit a new high in Q1,with January and February seeing the most bankruptcies since 2011.
- The number of private company bankruptcies has officially surpassed the peak levels observed during COVID.
- In 2023 there have already been a whopping 70major bankruptcies, which is only one less than the 71 recorded during the peak of COVID lockdowns at this time in 2020.
- Moreover, a massive wall of corporate debt looms, with over $200 billion worth of high yield bonds due in 2023 alone.
- Even private equity portfolio companies are on track to experience the most bankruptcies since 2020.
It Will Only Get Worse
Right now, interest rates are at their highest point since the financial crisis of 2008. Companies have experienced over a decade of inexpensive and plentiful capital. As operational challenges arose, they could easily acquire additional debt from lenders and manage their expenses. Today that is not a viable option. In this inflationary, high interest, and instable banking environment, lenders have become more cautious. Simultaneously, companies still bear the responsibility of repaying their borrowed funds. Yet, with the compounding pressures of inflation, surging material costs, a constrained labor market, and rising interest rates, their financial health has significantly diminished.
The underlying issues are highlighted by record corporate borrowing in February 2023, despite high interest rates, suggesting companies are struggling to maintain financial stability and are forced to borrow more at high rates. This is causing a hemorrhaging effect across the business landscape.
Consider the case of the SVB collapse as an example. Traditionally, SVB depositors consisted of newer, private companies that were growth stage firm and backed by private equity. However, in today's volatile market, characterized by a perfect storm of escalating interest rates, inflation, rising raw material costs, and a tight labor market, those very companies found themselves in dire need of cash to keep maintaining their operation. As a consequence, we witnessed a surge in these companies withdrawing funds from their accounts, which triggered a run at SVB that ultimately led to its downfall.
The Impact on Supply Chains
As more companies struggle with the perfect storm, we will see more bankruptcies. While you may think your business is strong and immune to these effects, have you considered your supplier, vendor, or third-party ecosystem? These are entities intricately linked to your business, meaning that their financial distress could spell significant trouble for you now and in the future.
In the case of supply chains, before the bankruptcy of acritical supplier becomes inevitable, the signs are always there. Companies don’t wake up one morning and find themselves in a state of insolvency. They will experience a slow bleed resulting from trying to manage high raw material costs, labor costs and rising cost of capital. This is a huge problem for your business because their rising costs and refinancing risk is your risk, but it comes in the form of late deliveries, poor quality and significant price increases when your suppliers try to renegotiate their contracts with you. Or worse they default on you and file for bankruptcy. That is hugely expensive.
As we navigate these challenging times, it's more important than ever for companies to prioritize financial stability and make informed decisions to safeguard their future success.
Monitoring the financial health of your suppliers, vendors, and third parties will forge success in your own company.
RapidRatings can help shield your supply chain from the perfect storm. With predictive analytics based on actual financial data, you can accurately forecast where you may have a costly supplier disruption looming on the horizon.