As Credit Stress Builds For Small Businesses, Private Bankruptcy Filings Are Blowing Past Their Peak Levels From The Covid Era

Before Silicon Valley Bank's shocking collapse, warning flags of a potential credit crunch were already flashing, as this year has seen a record number of small- to mid-sized private company bankruptcy filings, according to UBS.

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The biggest bank failure since the global financial crisis this month sent financial markets into a tumble as concerns about the effects of tighter credit conditions on US consumers and businesses were raised.

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In a recently released research note, Matthew Mish, head of the credit strategy at UBS, stated, "We believe one of the more underrated indicators of concern in US corporate credit is already originating from the Small and Mid-size Businesses sector."

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According to Mish, some of the "smallest enterprises are under the greatest pressure from rising rates, persistent inflation, and decreasing growth."

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Private bankruptcy filings have surpassed a peak set in the early stages of the COVID pandemic by a significant margin so far in 2023. According to the statement from UBS Evidence Lab, the 7.8 four-week moving average in late February dwarfed the 4.5 moving average in June 2020.

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The real estate sector is one of the industries with the highest number of bankruptcy filings this year. Meanwhile, global strategists at the Swiss investment bank stated that the healthcare industry is one to keep an eye on for indications that credit stress is affecting the US labor markets.

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Before the month's banking industry upheaval caused by the bankruptcies of SVB and crypto-friendly Signature Bank, the weekly data gathered by UBS points to unsettling tendencies about smaller companies going out of business.

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After saving the depositors at those banks, the FDIC is now facing more than $20 billion in costs, raising worries that other small banks would experience liquidity problems and reduce lending to businesses and retail customers.

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According to UBS, smaller and regional banks are "essential" to small and medium-sized enterprises because they hold 40% of the debt and loans at those businesses. According to a new report by Pantheon Macroeconomics, businesses with fewer than 500 employees account for 58% of the privately employed workforce in the US, highlighting the crucial position that these companies play in the greatest economy in the world.

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However, "the YTD spike is nonetheless stark - outright and relative to public filings - and a clear indication that a fulcrum of credit stress this cycle is in smaller corporates," Mish said. Fiscal stimulus and the Federal Reserve's Main Street Lending Program did prevent bankruptcy filings in 2020.

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Luckily, the disturbing trend in private files does not now appear to have affected the American labor market, Mish added.

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The US corporate chapter 7, 11, and 15 bankruptcy filings are monitored by the UBS Evidence Lab Corporate Bankruptcy Monitor. UBS summarized many key findings after poring over data, including the fact that the real estate, chemicals, healthcare, and retail sectors lead all others in terms of private bankruptcy cases.

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The top 15 sectors by filings year to date to data from the Bureau of Labor Statistics as a proportion of employment in the private sector were also mapped out by UBS. According to the findings, it will be important to pay attention to the healthcare, retail, construction, restaurant, and finance sectors going forward.

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Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, stated this week that it is still too early to tell whether the collapse of SVB will cause a credit crunch.

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According to Trade Algo, Kashkari stated in a townhall in St. Paul, Minnesota, on Thursday, "What's unclear right now is how much of the banking difficulties of the previous few weeks is leading to a protracted credit crisis which would then slow down the US economy."

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According to Kashkari, banks "have a lot of capital" on average, and the Fed, along with other authorities, is there to support the financial sector. It will take some time for us to properly establish whether there are still losses out there, the Fed official said, but that should offer us all comfort.

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