Will 2022 be a big year for bankruptcies?
The odds of default across most U.S. business sectors rose in the first three months of the year, with every sector except energy recording a higher median market signal one-year probability of default score at the end of the first quarter, according to S&P Global Market Intelligence data.
On a month-over-month pace, nationwide bankruptcies are piling up. In March, 1,805 commercial businesses filed for bankruptcy, a 26.4 percent increase over February’s 1,428 filings, said Epiq Bankruptcy, a provider of U.S. bankruptcy filing data.
In the U.S., apparel and fashion have mostly stayed out of the bankruptcy headlines to start the year, with Escada America the lone major brand filing for Chapter 11 protection. Two other recent bankruptcies occurred outside the U.S. British men’s wear brand TM Lewin had its second collapse into administration in two years, while U.K.-based footwear brand Steptronic Footwear Ltd. filed in March. Elsewhere on the fashion front, American Apparel founder Dov Charney personally filed for bankruptcy in the wake of a creditor battle.
“March is typically the month with the largest number of new bankruptcy filings on an annual basis,” said Chris Kruse, senior vice president at Epiq. “We continue to watch closely the bankruptcy activity as we emerge from the global pandemic and expect a return to a more active market in the months to come.”
Consumer discretionary businesses, which include retailers and brands, have a 2.5 percent probability of defaulting, marking the third-highest chance of any U.S. sector, S&P found. The percentage is a significant jump from the 1.6 percent chance of filing for bankruptcy as of Dec. 31, 2021.
The S&P scores, which represent the odds of default within a year, are based primarily on the volatility of share prices for public companies in the sector and account for country- and industry-related risks. The rise in probability of default scores comes as the value of every S&P 500 sector, except energy and utilities, fell at the end of the first quarter from the fourth quarter of 2021.
When narrowing down the consumer discretionary industry, computer and electronics retailers have a 4.7 percent chance of bankruptcy within a year, while Internet and direct marketing retail, which includes companies like Amazon, Stitch Fix, Revolve, The RealReal, Poshmark and ThredUp among others, has a 4.65 percent default chance.
In terms of total quarter-over-quarter increases in default rates, computer and electronics retailers had the third-highest jump, while Internet and direct marketing retail had the eighth-highest. Textiles came in ninth, with the industry’s median market signal more than doubling to 3.3 percent as of March 31 from 1.5 percent as of Dec. 31.
Currently, industrial real estate investment trusts (REITs) are the sixth-least vulnerable U.S. companies, with a 0.11 percent possibility of going under. This bodes well for businesses that own warehouses, which have already been the beneficiary of skyrocketing demand and low vacancy rates. The demand shift was a direct result of strong e-commerce spending throughout the Covid-19 pandemic, and space became even more of a necessity as supply chain and logistics constraints dominated 2021.
Retail and industrial real estate operators alike saw the second-largest decline in default risk, dipping from 2.9 percent as of Dec. 31 to 1.8 percent on March 31.
Epiq broke out bankruptcy data into commercial and noncommercial filings—the latter of which includes individual bankruptcies, which represent the overwhelming majority of these filings. In March, 36,049 total entities filed for bankruptcy, a 33.5 percent increase over February’s 26,993 filings.
The 34,244 total noncommercial filings for March represented a 34 percent increase from the February 2022 noncommercial filing total of 25,565, while the 1,805 total commercial filings that month represented a 26.4 percent increase from the 1,428 total commercial filings during the previous month.
Commercial chapter 11 filings increased 38 percent in March to 292, from 203 in February.
Small business filings, captured as subchapter V elections within chapter 11, increased 51 percent to 178 in March from 118 in February.
“Amid rising interest rates, growing inflation concerns, worker shortages and supply chain challenges, access to bankruptcy is imperative for struggling consumers and businesses,” said Amy Quackenboss, executive director for ABI, an organization dedicated to researching insolvency that includes nearly 10,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, which partnered with Epiq to provide the filing data.