Despite corporate defaults reaching the highest level since around the peak of the economic collapse, the story has been flying under the radar. It turns out that this has massive consequences not just for bondholders but in the overall economy.
The USA Today published a very interesting report Monday that looked at how corporate defaults have hit their highest level since the 2009 Great Recession.
Using data from S&P Ratings Services, the newspaper noted that 46 companies, including 37 American firms, have defaulted on their debt. This week alone, five companies have defaulted, such as specialty chemical company Vertellus Specialties and iron ore producer Cliffs Natural.
Companies are on track to surpass last year’s more than 100 defaults. In 2015, U.S. businesses defaulted on nearly $100 billion worth of debt.
Just why are default happening? The collapse in oil prices is one of the reasons. The Federal Reserve’s recent rate hike is another reason since it increases companies’ debt servicing payments.
Bondholders and stock investors are some of the casualties in these defaults. Since a lot of our pension funds, mutual funds and other investment portfolios contain corporate bonds, many will see pain and suffering in the coming years.
Corporate defaults happen when a borrower misses a payment on a bond, files for bankruptcy protection or exchanges distressed debt for new notes.
As the U.S. central bank is expected to raise rates even further, more corporate defaults could transpire.
Michael Snyder of Economic Collapse Blog wrote this dire warning this week:
“Personally, I give our economy an “A” for being able to maintain our unsustainable debt-fueled standard of living for as long as it has. Somehow we have managed to consume far more than we produce for decades, and the largest debt bubble in the history of the planet just keeps getting bigger and bigger and bigger.
“Of course we are very much living on borrowed time at this point, but I truly hope that the bubble economy can keep going for at least a little while longer, because nobody should want to see what is coming afterwards.”
With corporate defaults on the rise, the next big concern should be government defaults.
What recovery??? Debt fueled recovery, the American way for the last 40 years. Almost no one saves for anything today.
Why would any CEO use company money to do anything?
With low interest rates and the ability to write-off the cost of credit on the companies tax forms, it has become how companies operate. Debt is just seen as another cost of doing business, with a government subsidy built into the math.
Since 2007 my credit card balances have increased 900% and I am not alone. Just spending an extra $105 per month can add up over 8 years. Now $11,000 in credit card debt, I am using 40% of my monthly income to pay it down. I will be at zero in 24 months.