Data from the Administrative Office of the U.S. Courts showed the number of businesses seeking bankruptcy protection up 39% over the past four quarters compared to the previous four. On a year-over-year basis, filings have grown for five consecutive quarters at an average rate of 42%, stated Euler Hermes ACI Chief Economist Dan North.
To get a better idea of how bankruptcy filings will evolve, North pointed to the Federal Reserve's quarterly Senior Loan Officer Opinion Survey for some insight into the future.
The survey asks respondents from larger banks a range of questions about lending conditions, such as whether the bankers are increasing or decreasing spreads. Historically, when the net percentage of respondents who are increasing spreads for loans to smaller businesses exceeds 20%, bankruptcies usually rise the following quarter. "In fact they rise three quarters of the time at an average increase of more than six percent," says North.
In April, though, North said that net percentage of increasing spreads had skyrocketed to a record-setting 63.6%, strongly suggesting that bankruptcies for smaller companies are very likely to rise next quarter. The previous record increase had been 41.8%. Additionally, large companies didn't fare any better, as the net percentage of banks increasing spreads on those loans also set a record of 71%, well above the previous record of 59%, said North.
"Clearly the Fed survey shows just how difficult the bank loan market currently is," he says. "When bank financing becomes very difficult, it adds just one more pressure to the challenging conditions businesses are currently facing. The Fed survey's correlation with future bankruptcies lends substantial evidence on top of record high gas prices (inflation adjusted), a deteriorating job market, and a sputtering credit market, that businesses are looking at tough times ahead, and that business bankruptcies are very likely to increase, perhaps substantially."