A new wave of financial trouble for companies saddled with debt is being caused by rising helium costs, missing auto parts, and shipping delays, as well as broader concern that the US economy is on the verge of a downturn.
Supply chain pressures and red-hot inflation have caused companies to report poor earnings in recent weeks. The company, Armstrong flooring Inc., has already been pushed into bankruptcy due to higher costs. Service King is trying to find ways to reduce its debt load as it struggles to get mechanics back to work.
Party City and Service King did not respond to a request for comment.
At the end of last year, companies hit with rising prices struggled to pass on the costs to customers. The pain isn't going to go away any time soon, as supply chain issues show no signs of improving, while consumer demand is set to slow due to higher interest rates.
The three factors are for sure a recipe for distress, according to the managing partner and chief investment officer of the company.
The amount of corporate debt trading at distressed levels was the highest since December 2020. At the start of the month, US bankruptcy filings hit a one-year high, as a broader pickup in filings with at least $50 million in liabilities occurred.
The Federal Reserve's plans to raise rates at a rapid pace will only make the situation worse for distressed companies. Sanjeev Khemlani, leader of the senior lender advisory practice at FTI consulting Inc., said that higher interest rates will make it difficult for them to make debt payments.
Companies that have run out of cash but don't have any triggers on their debt could be pushed to file for Chapter 11 if borrowing costs go up.
Melanie Cyganowski, a former bankruptcy judge and partner at Otterbourg PC, said in an interview that the removal of Covid-19 support will make consumers cut back on their spending this year.
Health-care companies with higher labor costs will be under stress due to high transportation costs.
I think we are in a perfect storm, she said.
Consumer demand over the next few quarters will determine whether the financial pressures these firms face will develop into a full-blown default cycle.
When earnings fail to meet expectations, investors penalize companies that are unable to raise prices enough.
Diebold's bonds fell a record 39 cents in a single day after the maker of automated teller machines reported a larger-than-expected loss. Rufino said that the ability to buy and sell credit has tightened due to the broader market conditions.
Increasing prices for consumers may not be enough to offset supply chain problems. The firm implemented a freight surcharge, but that still wasn't enough, because it negotiated amendments to its debt and tried to get acquired prior to filing for bankruptcy.
The company's increasing costs outpaced its pricing power, according to court papers.
Jim Mesterharm, head of AlixPartners's turnaround practice in the Americas, said that Russia's invasion of Ukraine will lead to higher food prices.
He said that the supply chain challenges don't necessarily have an end game set.
With assistance from Jeremy Hill.