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US corporate bankruptcies have hit their highest level since the aftermath of the global financial crisis as elevated interest rates and weakened consumer demand punish struggling groups.
At least 686 US companies filed for bankruptcy in 2024, up about 8 per cent from 2023 and higher than any year since the 828 filings in 2010, according to data from S&P Global Market Intelligence.
Out-of-court manoeuvres seeking to stave off bankruptcy also increased last year, outnumbering bankruptcies by about two to one, according to Fitch Ratings. As a result, priority lenders to issuers with at least $100mn of aggregate debt experienced the lowest recovery rates since at least 2016.
The collapse of party supply retailer Party City was typical of 2024 corporate failures. In late December, it submitted its second bankruptcy filing in as many years, after emerging from Chapter 11 proceedings in October 2023.
Party City said it would shut down its 700 stores nationwide after struggling “in an immensely challenging environment driven by inflationary pressures on costs and consumer spending, among other factors”.
Consumer demand has waned as the Covid-19 pandemic stimulus ebbed, hitting companies that rely on discretionary consumer spending particularly hard. Other major bankruptcies last year included food storage manufacturer Tupperware, restaurant chain Red Lobster, Spirit Airlines and cosmetic retailer Avon Products.
“The persistently elevated cost of goods and services is weighing on consumer demands,” said Gregory Daco, chief economist at EY. The burden is especially heavy for families on the lower end of the income spectrum, “but even in the middle and on the higher end, you’re seeing more caution”.
The pressure on companies and consumers has eased somewhat as the Federal Reserve has begun to reduce rates, though officials have indicated they intend to cut by just half a percentage point more in 2025.
Peter Tchir, head of macro strategy with Academy Securities, said there were mitigating factors, including the relatively low spread between the rates for riskier corporate borrowing and government debt.
“Obviously, it’s not great that this is happening. But when I think about what could really have a knock-on effect to the broader economy or the banking system, this is not really getting me excited yet,” Tchir said.
There were only 777 bankruptcy filings in 2021 and 2022 combined, when the cost of money was much lower because of the Fed’s rate-cutting programme.
That figure jumped up to 636 in 2023 and continued to climb last year even as rates started to come down in late 2024. At least 30 of last year’s bankruptcy filers had at least $1bn in liabilities at the time of filing, according to the S&P data.
Historically, there are generally the same number of bankruptcies as there are out-of-court actions to reduce the odds of insolvency.
These sorts of moves, euphemistically known as liability management exercises, have become increasingly common and have grown to represent a large portion of US corporate debt defaults in recent years, and that trend continued in 2024, said Joshua Clark, a senior director at Fitch Ratings.
These debt manoeuvres are often considered a last resort to avoid filing for court protection. Yet in many instances, the companies wind up bankrupt anyway if they cannot fix their operational woes.
“Maybe their profitability will go up, or interest rates will go down, or a combination of both of those, really in order to stave off bankruptcy,” Clark said, adding that such liability workouts can negatively impact lenders by stacking more debt atop existing liabilities.
Additional reporting by Amelia Pollard