The economy appears to be humming along, but there could be a debt tsunami brewing beneath the surface.

According to S&P Global Rankings, the percentage of companies that have defaulted on their debt multiple times is at its second-highest level since the Great Recession.

In 2023, more than one-third (35%) of global corporate defaults originated by issuers considered to be “re-defaulters.” These are companies that have defaulted over and over as many as five times.

That's a major leap from 24% as of year-end 2023 and just 14% in 2008.

Although growing default rates appear to point to company-specific problems, the alarming trend suggests the economy could be more fragile than previously thought.

S&P research analyst Nicole Serino explained that companies piled on the debt in anticipation of lower interest rates. Unfortunately, lower interest rates aren't a guarantee anymore.

As a result, “You saw that bubble grow, and grow, and grow,” Serino said.

The real danger of corporate defaults

Since the Fed started raising rates, corporations have had a much harder time accessing capital and consequently paying their debt obligations.

M3 Partners founding partner Mohsin Meghji observed: “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%.”

Expensive debt has already taken a toll on businesses.

Last year, nearly 600 companies filed for bankruptcy protection, a level not seen in over a decade, with the exception of 2020, according to S&P data.

There’s also been an increase in the number of so-called zombie companies. These are businesses that struggle to pay the interest on their debts, placing additional strain on the economy.

The reason is that instead of investing more money into the economy, innovation, and growth, they’re having to direct more of their available capital toward debt service.

According to New York University bankruptcy expert Edward Altman, the share of zombie companies that are publicly traded in the 20 biggest economies has increased from 1.5% in the 1990s to nearly 10% today.

Tough landing

While corporate debt levels are concerning, Wall Street isn't yet sounding the alarm about an imminent recession.

Although optimistic, JPMorgan CEO Jamie Dimon remains cautious, suggesting that if things stay status quo, the economy is likely to pull through.

But if things get any worse, particularly in the bond market, he thinks real estate would crash—which would have a cascading effect on the rest of the economy.

Goldman Sachs CEO David Solomon echoes those concerns.

He's warning of a perfect storm of high inflation, geopolitical tensions, and a troubled commercial real estate market, which could throw a wrench into economic growth.

“While the environment is constructive and markets expect a soft landing, the trajectory is still uncertain,” Solomon stated.

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