Corporate Bankruptcies Rise At Rapid Rate

Corporate Bankruptcies Rise At Rapid Rate

Reuters reports that publicly traded corporate bankruptcies are at the highest level seen in five years.

The article notes a divergence of opinion as to whether the cause is a more aggressive approach by lenders or the collapse of oil and commodity prices.

The majority of these bankruptcies appear to be in the oil or commodities fields, involving companies such as Allied Nevada Gold Corp., DPZ Resources, Inc., Dune Energy Inc., and Quicksilver Resources Inc. Nevertheless, non-commodities companies such as Caesars Entertainment Corp., RadioShack Corp., and Altegrity Inc. have also filed.

Reuters suggests that the quantitative easing program from the Federal Reserve created a low interest environment, which made it easier for weaker companies to maintain viability. That environment may now be coming to an end. Moreover, Reuters notes that bankers appear more willing now to default weak borrowers than they were in the recent past. This is not surprising. As stated by Greg Segal of Versa Capital Management, “In a better economy, banks are in a better position to take losses.” In other words, as the value of loan collateral increases, banks have a better “take-out” position on default than they used to. Reuters also comments that the sharp rise in the dollar has been squeezing the export earnings of American companies, creating further grounds for financial distress.

In any event, this will merit careful attention until it is clear whether a trend has been established.