Corporate bankruptcies hit highest level since aftermath of Great Recession

More American companies are going broke than at any time since the aftermath of the Great Recession.

According to a new report by S&P Global Markets Intelligence, 75 corporations filed for bankruptcy protection in June, exceeding the Covid-era high of 74 in July 2020.

Between January and June, 356 corporations filed for bankruptcy, exceeding any comparable period over the last 13 years.

Some of the most notable bankruptcies last month included electric vehicle maker Fisker Group, Redbox rental kiosk operator Chicken Soup for the Soul Entertainment, and Consulate Health, a senior healthcare service operator.

Consulate Health became the 17th billion-dollar bankruptcy filing this year, joining Red Lobster, Enviva, and Audacy, among others.

S&P Global blamed “High interest rates, supply chain issues, and slowing consumer spending” for the surge in bankruptcies, which seem to have intensified over the past two years.

Even then, the recent bankruptcy spike would be expected during a recession, but not when the economy is supposedly in good shape.

During the height of the pandemic in 2020, 639 U.S. corporations sought bankruptcy protection. To the surprise of many, bankruptcy filings rose to 642 in 2023.

With thousands of corporations barely hanging on, 2024 is expected to be much worse than last year.

Zombies are dying

The rise in corporate bankruptcies may seem like it came out of nowhere, but it reflects a much bigger problem that’s been bubbling beneath the surface for years.

According to data from the Associated Press, the number of publicly traded “zombie” companies has soared to nearly 7,000, with 2,000 located in the U.S.

In the corporate world, a zombie is a company earning just enough to continue operating and servicing its debt but can’t actually pay it off. These companies are barely getting by but lack excess capital to reinvest in their business and spur growth.

For years, zombie companies used cheap debt to plug holes in their business. That all began to change in 2022 when the Federal Reserve started hiking interest rates.

With due dates looming on billions of dollars in outstanding loans, experts say many zombies simply won’t make it in a higher-rate environment.

Being a zombie company was possible “only due to continuously lower interest rates and ample liquidity chasing yield,” wrote markets analyst Michael A. Arouet. “Let’s see what happens when these companies need to roll over their debt at current rates.’

Miami investor Mark Spitznagel told the Associated Press that “the clock is ticking” on these companies.

“They’re going to get crushed,” added Valens Securities managing director Rober Spivey.

Given the massive spike in debt-laden companies in recent years, a wave of zombie bankruptcies could threaten the economy. In 2021, the Fed estimated that roughly 10% of U.S. companies are considered “zombie firms.”

That share “has been increasing over time,” Bruno Albuquerque, an economist at the International Monetary Fund, told CNBC. “This has detrimental effects on healthy firms who compete in the same sector.“