January 22, 2024

Bankruptcies are bad. They certainly matter and aren’t looking good today. However, people often get too caught up with bankruptcies, especially when they’re only one piece of the puzzle.

See, when companies are stressed, they have more options than declaring bankruptcy. Most will try to restructure debt first. Or they might get as close to default as possible without actually entering default. As a result, if you just watch bankruptcies, you’re missing the bigger picture.

Case in point: the biggest form of default last year was the “distressed exchange.”

That’s when a struggling company wants to avoid bankruptcy and tries negotiating with its lenders. The company might offer to buy back the debt at a steep discount. Or it might exchange it for a much smaller debt.

These deals are not like normal refinancing – lenders take a discount. But distressed exchanges help struggling firms avoid bankruptcy and allow creditors to get back some of their money.

Seeing just bankruptcies, the U.S. economy is struggling. But when we broaden the view of corporate health, the picture gets worse. This year more companies have undergone distressed exchanges than have gone bankrupt. And there are plenty of missed interest payments, out-of-court restructuring deals, and confidential restructuring procedures underway that don’t show up in the bankruptcy numbers.

In fact, only three years have looked worse than 2008’s slog of 64,318 bankruptcies: the height of the Great Recession in 2009, the energy price route in 2016, and the start of the pandemic in 2020. Today’s signs of corporate stress are now resembling the tough times of 2020.

To summarize, corporate stress is building, and more companies are on the brink of bankruptcy than many folks realize. Distressed exchanges and overall corporate stress indicate a potential recession on the horizon.