Bankruptcies are surging - and Fed rate hikes are to blame, economist says

• Rising US corporate bankruptcies are due to Fed rate hikes, Apollo chief economist said.
• Higher rates have increased borrowing costs, pressuring companies with high levels of debt.
• Filings so far this year have reached 516, potentially on track to outpace 2020.

Bankruptcies are surging this year and on track to outstrip 2020, potentially setting up 2023 to be the worst year for corporate bankruptcies in over a decade.

Last month saw 62 filings, bringing the year-to-date total to 516, according to S&P Global. That's more than in all of 2021 or 2022 and nearly as much as the 518 filings in the first three quarters of 2020, when the pandemic roiled the economy.

For all of 2020, there were 639 filings, the most since since 2010, when 827 companies filed for bankruptcy protection.

"The September data for bankruptcy filings are out, and more and more companies are going bankrupt because of Fed hikes," said Apollo chief economist Torsten Sløk in a note on Friday.

The Fed has raised rates 11 times since March 2022 in an effort to bring inflation down to the central bank's 2% target.

While inflation has indeed cooled sharply, Fed rate hikes also mean businesses have to pay more in borrowing costs because they owe more money on any floating-interest debt they have, and on any debt they refinance. 

"Bankruptcies are hitting companies with high levels of debt and low earnings in the Consumer discretionary, Healthcare, and Industrials sectors," Sløk added.

SmileDirectClub Inc., an oral-care company, led the way for the third quarter's biggest bankruptcy with more than $1 billion in liabilities, according to S&P Global.

Some of the other headline bankruptcies this year have included the collapse of Yellow, Bed Bath & Beyond, and Silicon Valley Bank.

According to experts, a rising wave of bankruptcies and debt defaults could risk rocking the economy towards a recession.