Small businesses are filing for bankruptcy at a higher rate than at the peak of the pandemic - and a looming credit crunch could make things worse
Welcome back, readers. I'm Phil Rosen, writing to you from New York.
Now that it's April, we can say a spate of banks collapsed last month, but the repercussions of the crisis continue to unfold as if it all happened yesterday.
The chatter now centers around a looming credit crunch — but the troubling part is that red flags were flying well before we heard a peep from Silicon Valley Bank.
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1. Before March, the number of small- and mid-sized businesses filing for bankruptcy was already on the rise, meaning the bank turmoil only exacerbates an existing trend.
UBS strategists wrote in a note last week that those companies have been facing pressure from rising rates, sticky inflation, and slowing growth.
Already in 2023, the number of private bankruptcies has surpassed the previous peak set in the early stage of the COVID-19 pandemic, my colleague Carla Mozeè writes.
Bankruptcy hot spots right now, according to UBS, include the real estate industry, which has led this year's increase in filings, but the healthcare sector could follow suit as credit stress seeps into the labor market.
The FDIC is facing more than $20 billion in costs as a result of the tumult, and the failures last month have stoked concerns that other vulnerable banks will soon be forced to pull back on lending as they see lower deposit rates and tighter financial conditions.
Those smaller regional and community banks are particularly critical as a source of credit to small and mid-sized businesses, UBS said, as they hold 40% of the loans and debt to those companies.
"The YTD spike is nevertheless stark — outright and relative to public filings — and a clear indication that a fulcrum of credit stress this cycle is in smaller corporates," strategists said.
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