‘Bankruptcy applications’ surged in the U.S. last year, “If the timing of the interest rate cut is delayed, the increase is expected to continue this year”

Last year, there were over 45 bankruptcies, and the number of applications for business restructuring also increased by 4,000% compared to the previous year
Unicorn companies with a corporate value of more than $72 billion, such as WeWork and Bird, have also gone bankrupt
Recently, expectations for interest rate cuts have been readjusted, and bankruptcy filings are expected to increase again this year
Photo = Getty Image Bank

Last year, the number of bankruptcy applications by corporations and individuals in the United States increased significantly. This is due to the deterioration of corporate and household finances as lending standards have been greatly strengthened under the high interest rate trend that has continued for the past two years. While not only small and medium-sized companies, but also unicorn companies such as WeWork and Bird, which were once valued at more than $2 billion, have failed to avoid bankruptcy, it is predicted that the number of bankruptcy applications by American companies and individuals will increase this year as well.

american company The number of bankruptcy applications last year increased by 18% compared to the previous year

According to a report by Reuters on the 3rd (local time) from bankruptcy information provider Epiq AACER, the number of bankruptcy applications for U.S. corporations last year was 37, an 8,390% increase from the previous year (18). done. In December last year, the number of cases was 44, a decrease of 5,186 from the previous month (12), but a 3% increase compared to the same period last year.

Applications for corporate bankruptcy protection under Article 11 (Chapter 11) of the Bankruptcy Act also increased by 3,819% to 72 cases from 6,569 cases in the previous year. Chapter 11 is a provision that allows companies that are difficult to revive on their own to undergo corporate rehabilitation procedures by undergoing restructuring procedures under the supervision of the bankruptcy court. In addition, personal bankruptcy applications totaled 36, an 6,911% increase from the previous year (18).

It is interpreted that the tightened lending standards for companies and individuals as the economic stimulus package poured in during the pandemic was reduced led to a surge in bankruptcy applications. In addition, high interest rates, which have risen sharply as the Federal Reserve System (Fed) has raised the base interest rate 2022 times to suppress inflation since March 3, also appear to have significantly reduced the financial conditions of economic entities. Currently, the US base interest rate is 11-5.25%, maintaining the highest level in 5.5 years.

A crisis that even Silicon Valley’s representative unicorn companies could not avoid

Some recently went bankrupt include unicorn companies that once represent startups valued at more than 1 billion dollar (W1.3 trillion). A case in point is WeWork, a global shared office company. WeWork, which caused a sensation in the shared office earlier, peaked in early 2019 and its market capitalization exceeded 47 billion dollar (W62 trillion). However, in November of last year, it was unable to overcome the worsening management that had continued for several years and eventually went bankrupt, causing its stock price to become a piece of paper.

WeWork’s downfall began when its first attempt to be listed on the New York Stock Exchange to raise funds in 2019 failed. After the failure of the listing, WeWork’s co-founder Adam Newman was ousted and other key executives left, and shortly thereafter, the company fell under the influence of the COVID-19 pandemic that hit the world and faced repeated crises. As many offices closed during the pandemic and the proportion of workers working from home increased, profitability deteriorated sharply, and even new businesses ended in failure.

Bird, an American company that has been considered a pioneer in the shared scooter industry, is also a representative unicorn company that filed for bankruptcy last year. Bird, which achieved rapid growth in a short period of time thanks to the sharing economy craze that swept through the startup industry in 2017, received investment from mainstream venture capitalists in Silicon Valley and expanded its electric scooter sharing business to 350 global cities. At one time, the company’s value was estimated at up to $25 billion (approximately 3 trillion won), but business rapidly deteriorated as an atmosphere of reluctance to share and use products was created due to concerns about pandemic infection. It attempted to raise funds through SPAC listing in 3,000, but the stock price plummeted after listing. It was eventually delisted in September of last year and filed for bankruptcy three months later.

In addition, Silicon Valley Bank (SVB) went bankrupt in March last year. The aftermath of SVB’s bankruptcy, which was a major source of funding in Silicon Valley, led to a series of bankruptcies for related startups and small and medium-sized businesses. The financial conditions of companies have already deteriorated significantly since 3, when the Federal Reserve’s policy of sharp interest rate hikes began, and this is due to the authorities’ additional strengthening of bank loan regulations to prevent the collapse of SVB.

U.S. commercial bank total loan delinquency rate (blue line) and change rate compared to the previous quarter (red line)/Photo = Fred

Bankruptcy rate may increase due to strong U.S. economic indicators

The problem is that it is predicted that the increase in bankruptcy applications will continue this year. Although the number of bankruptcy applications is still far below the 2019 in 75 before the pandemic, analysis suggests that if limited financial conditions continue, the bankruptcy rate will inevitably increase. Michael Hunter, Vice President of Epic AACER, said, “As expected, the number of new bankruptcy filings in 7,816 increased compared to the previous year.” “Considering the highest level of household debt, the number of corporations applying for bankruptcy protection will increase in 2023,” he predicted.

The increase in personal bankruptcies is also a concern. According to the Federal Reserve Bank of New York, household debt in the United States has already reached a record high of $3 trillion at the end of the third quarter of last year, and even mortgage interest rates and credit card delinquency rates are continuing to rise. Last November, the U.S. 17-year fixed mortgage interest rate soared to close to 3,000%, breaking the highest level in 11 years, and during the same period, the credit card delinquency rate also continued to rise to about 30%, exceeding the pre-pandemic level.

An official from the American Bankruptcy Institute (ABI) said, “In 2010, bankruptcies for homeowners accounted for more than 70%, but now they have decreased significantly.” “The likelihood that they are mainly tenants is 3 to 4 times higher,” he analyzed. He added, “The size of student loans has also increased significantly, and there are concerns that student loans may not be exempted if bankruptcy applications increase.”

In addition, the recent increase in uncertainty about when the Federal Reserve will begin interest rate cuts may also increase the bankruptcy rate. In particular, expectations of a Federal Reserve interest rate cut have continued to be readjusted since the release of indicators last week that the U.S. job market remains strong. An official in the domestic financial investment industry said, “The bankruptcy rate of companies and individuals is closely related to the central bank’s monetary policy, which affects market interest rates.” He added, “With inflation not yet falling to the target, the economy is doing better than the Federal Reserve expected.” “If it holds out, there will be no need for the Federal Reserve to quickly retreat from its high interest rate policy, and as a result, there is a high possibility that the high interest rate trend will be maintained in the market,” he said.

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