Bankruptcy Indicators: Analyzing the factors behind rising insolvency rates
Our Indicators data shows new Bankruptcy deals increasing by 20% globally over the last quarter of 2022, with an overall increase of 35% YoY.
By AnsaradaThu Mar 16 2023Due diligence and dealmaking, Industry news and trends, CEO-CFO, Bankruptcy and Insolvency
After two years of decline in insolvency numbers, the latest data reveals a new trend - an increase of 35% YoY in bankruptcies. According to Ansarada's Deal Indicators data, new bankruptcy deals surged by 20% in the final quarter of 2022. Analysts from the Business Review are also predicting a further increase of 19% in insolvencies for 2023.
The support measures provided by governments during the pandemic kept fragile and struggling businesses temporarily afloat, which contributed to the decline in insolvency rates. However, the analysts expect the insolvencies to increase in 2023, particularly among companies that did not adapt their business models to the changes spurred on by the pandemic.
Businesses in the international trade, retail, energy and crypto spaces will be affected, especially those that have been directly impacted by the current geopolitical state. The ‘crypto contagion’ has already affected the US, hitting high-profile crypto industry participants, crypto exchange platforms, and banks that joined the crypto movement (see US bank Silvergate Capital’s $1bn loss). The International Financial Law Review predicts that this contagion will start leaking into Asia as well.
Another category of insolvencies will stem from companies that took advantage of debt bond financing five to eight years ago, which they can no longer afford to uphold. Inflation and interest rate hikes are affecting markets globally, and interest rates are expected to continue rising. Senior economist Phil O’Donaghoe predicts four more interest rate hikes in Australia by August 2023, and Bloomberg predicts rates to hit 5.25% by year's end in the US.
The great availability of cheap financing since the crash of 2008-09 has led to companies leveraging up their balance sheets. They have reached a point where, at current market interest rates, they cannot afford financing, and financing is no longer available. Thomas Lauria, Global Head of Financial Restructuring and Insolvency at White & Case, said, “What you see is companies that took advantage of the great availability of cheap financing since the crash of 2008-09, which have levered up their balance sheets to a point where—at current market interest rates—they not only cannot afford financing, but financing just is not available.”
As interest rates are expected to continue rising, companies will be forced to look for other means of restructuring, despite the seller-friendly conditions. Falling valuations and a steadily increasing cost of capital may result in more companies filing for bankruptcy in the near future.
The support measures provided by governments during the pandemic kept fragile and struggling businesses temporarily afloat, which contributed to the decline in insolvency rates. However, the analysts expect the insolvencies to increase in 2023, particularly among companies that did not adapt their business models to the changes spurred on by the pandemic.
Businesses in the international trade, retail, energy and crypto spaces will be affected, especially those that have been directly impacted by the current geopolitical state. The ‘crypto contagion’ has already affected the US, hitting high-profile crypto industry participants, crypto exchange platforms, and banks that joined the crypto movement (see US bank Silvergate Capital’s $1bn loss). The International Financial Law Review predicts that this contagion will start leaking into Asia as well.
Another category of insolvencies will stem from companies that took advantage of debt bond financing five to eight years ago, which they can no longer afford to uphold. Inflation and interest rate hikes are affecting markets globally, and interest rates are expected to continue rising. Senior economist Phil O’Donaghoe predicts four more interest rate hikes in Australia by August 2023, and Bloomberg predicts rates to hit 5.25% by year's end in the US.
The great availability of cheap financing since the crash of 2008-09 has led to companies leveraging up their balance sheets. They have reached a point where, at current market interest rates, they cannot afford financing, and financing is no longer available. Thomas Lauria, Global Head of Financial Restructuring and Insolvency at White & Case, said, “What you see is companies that took advantage of the great availability of cheap financing since the crash of 2008-09, which have levered up their balance sheets to a point where—at current market interest rates—they not only cannot afford financing, but financing just is not available.”
As interest rates are expected to continue rising, companies will be forced to look for other means of restructuring, despite the seller-friendly conditions. Falling valuations and a steadily increasing cost of capital may result in more companies filing for bankruptcy in the near future.
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The Deal Indicators report was created to help our customers benefit from the wealth of data we collect anonymously through our data rooms and platform. Learn more about what’s in store for 2023.
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