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Cornerstone Research: High Inflation and Interest Rates Contribute to Increase in Bankruptcy Filings

October 2, 2024
in News
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Large corporate bankruptcy filings continued to climb in H2/23 through H1/24, according to a report released by Cornerstone Research. Filings in the services, manufacturing, finance, insurance, and real estate industries contribute to year-over-year increase.

The report, Trends in Large Corporate Bankruptcy and Financial Distress — Midyear 2024 Update, reveals a notable increase in chapter 7 and chapter 11 filings among public and private companies with assets exceeding $100 million. Over the past 12 months (H2/23 to H1/24), the number of filings rose by 8%, reaching 113 compared to 105 in the previous 12-month period (H2/22 to H1/23). This figure is 43% higher than the annual average of 79 observed between 2005 and 2023. Notably, 60 of these bankruptcies were recorded in H1/24, nearly 50% above the semiannual average of 40 filings between 2005 and 2023.

The recent rise in large corporate bankruptcies reflects the challenging economic environment many major companies have been navigating amidst high inflation and interest rates.

In H1/24, the number of mega bankruptcies — those filed by companies with over $1 billion in reported assets — reached their highest half-year numbers since 2020. Companies filing mega bankruptcies in the last 12 months most commonly identified the following contributing factors: (i) rising costs due to high inflation and interest rates, (ii) lingering impacts of COVID-19, (iii) increased competition for the company’s products or services and (iv) unsuccessful strategic initiatives.

“The recent rise in large corporate bankruptcies, with an 8% increase in filings over the past 12 months, reflects the challenging economic environment many major companies have been navigating amid high inflation and interest rates,” Matt Osborn, a principal at Cornerstone Research and coauthor of the report, said. “As the economic landscape continues to evolve, it is clear that the rising costs, lingering effects from the COVID-19 pandemic and increased competition have continued to take a toll on many large and established companies.”

Osborn noted that out-of-court refinancings known as “uptiering” transactions are also on the rise. He observed that despite the potential financial benefits for the borrower from this structure, a substantial fraction of the companies that undertook an uptiering transaction in past years have since filed for chapter 11 bankruptcy. It remains to be seen if this trend continues for the more recent uptick in uptiering transactions observed in 2023 and H1/24.

The most common venues for bankruptcy filings were Delaware and the Southern District of Texas, accounting for 43% and 13% of filings in H1/24, respectively. Following the resignation of Judge David R. Jones in October 2023, bankruptcy filings in the Southern District of Texas decreased by 65% in H1/24 compared to H1/23. From 2017 to 2023, Judge Jones took on 81 large corporate bankruptcy cases, the highest number of cases among bankruptcy judges nationwide.

The services and manufacturing industries saw increased filings, with 17 and 15, respectively, in H1/24. The finance, insurance and real estate industry also experienced an increase in bankruptcies, with 10 filings in the first half of the year.

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