Federal Reserve Board Chairman Jerome Powell departs after speaking during a news conference following the Federal Open Market Committee meeting, at the Federal Reserve in Washington, DC, on June 14, 2023.
The Federal Reserve plans to keep hiking interest rates to stem inflation, which means an increase in corporate default rates is likely in coming months.
The corporate default rate rose in May, a sign that U.S. companies are grappling with higher interest rates that make it more expensive to refinance debt as well as an uncertain economic outlook.
There have been 41 defaults in the U.S. and one in Canada so far this year, the most in any region globally and more than double the same period in 2022, according to Moody's Investors Service.
Earlier this week, Fed Chairman Jerome Powell said to expect more interest rate increases this year, albeit at a slower rate, until more progress is made on lowering inflation.
Bankers and analysts say high interest rates are the biggest culprit of distress. Companies that are either in need of more liquidity or those that already have hefty debt loads in need of refinancing are faced with a high cost of new debt.
The options often include distressed exchanges, which is when a company swaps its debt for another form of debt or repurchases the debt. Or, in dire circumstances, a restructuring may take place in or out of court.
"Capital is much more expensive now," said Mohsin Meghji, founding partner of restructuring and advisory firm M3 Partners. "Look at the cost of debt. You could reasonably get debt financing for 4% to 6% at any point on average over the last 15 years. Now that cost of debt has gone up to 9% to 13%."
Meghji added that his firm has been particularly busy since the fourth quarter across numerous industries. While the most troubled companies have been affected recently, he expects companies with more financial stability to have issues refinancing due to high interest rates.
Through June 22, there were 324 bankruptcy filings, not far behind the total of 374 in 2022, according to S&P Global Market Intelligence. There were more than 230 bankruptcy filings through April of this year, the highest rate for that period since 2010.