Despite the improving the economy, the number of companies at risk of going bust is rising faster than at any time since the Great Recession.
According to credit rating agency Standard & Poor’s, 52 companies have defaulted on their debt in the first six months of this year. That’s more than double the number of companies that missed interest payments in the first half of 2014, and it’s close to eclipsing the 60 companies that defaulted in all of 2014. It is also the highest pace of defaults since 2009.
The spike in defaults is in part because of growing troubles in the energy sector. Oil companies have significantly upped their borrowing in the past few years, in order to ramp up drilling and capitalize on high oil prices. Instead, oil prices have plunged 50% in the past year to a recent $63. In May, a Federal Reserve study showed that banks were cutting oil companies credit lines and demanding more collateral on new borrowings. Of the companies that have defaulted this year 13 have been in the oil patch.
Among the notable bankruptcies so far this year have been RadioShack (RSH) and Doral Financial, one of Puerto Rico’s largest banks.
The most recent corporate defaulter is coal mining company Walter Energy, which missed interest payments for the third time this week. The company, which in the past has said it has plenty of money on hand, is in the middle of negotiations with lenders.
But corporate America in general has taken advantage of low interest rates to ramp up their borrowing. U.S. corporate debt issuance is rising at its fastest pace ever in 2015. That is a sign that corporations are more confident about the economy. But some worry that as interest rates rise many companies will not be able to either repay or be able to afford to refinance their debts at higher rates.
S&P says the default rate could rise to as high as 4.7% for corporate borrowers by the first quarter of next year, up from 1.8% three months ago.
