According to Guggenheim Investments, corporate bankruptcies are projected to reach the highest level in 13 years due to the Federal Reserve’s rising interest rates. Already, over 450 corporations have filed for bankruptcy protection in 2022 through August, surpassing the annual totals of the previous two years. At this rate, Guggenheim’s macroeconomic and research team predicts that this year’s filings will be the highest since 2010.
Guggenheim’s team, led by Mike Bush, U.S. economist, believes that a reacceleration of the U.S. economy is unlikely. They point out that key factors supporting the economy have started to fade, such as the boost from declining inflation, a growing fiscal deficit, and limited layoffs. In a new client outlook, the team wrote, “The fading of these tailwinds will be a gradual process, but the peak of their support to the economy is now behind us.” As a result, they expect the economy to slow by the end of the year, potentially leading to a recession by early 2024.
Importantly, companies often default on their debts when liquidity runs out. Since the Federal Reserve began increasing its policy rate to a 22-year high of 5.25% to 5.5%, borrowing costs for corporations have surged. Like U.S. homeowners, many corporations took advantage of ultra-low rates during the pandemic to refinance their debts, which provided some breathing room from the Fed’s rate hikes. While it is anticipated that the central bank will keep its rate unchanged at its upcoming September meeting, it is expected to maintain high rates for an extended period.
Cash to the Rescue
Interestingly, higher rates do not necessarily result in increased interest expenses for corporations. Guggenheim explains that although corporations face higher borrowing yields in the corporate bond market (ranging from 5.8% to 8.4%), overall interest expenses have actually declined due to gains on cash and cash-like investments.
Record Interest Income for U.S. Nonfinancial Corporates
According to a recent report, U.S. nonfinancial corporates are expected to earn a record $171 billion in interest income from their cash, Treasury, and Agency debt holdings. This reflects a significant increase of $102 billion compared to the previous year.