Economic Update

The U.S. manufacturing rate has contracted for 13 consecutive months with no change in November holding steady at 46.7% on the ISM Index. Unemployment ticked down to 3.7% to 3.9%, still demonstrating its strength. The economy added roughly 200,000 jobs, which was slightly better than expected as the automotive and Hollywood strikes ended. Inflation was at 3.1% down by 0.1% for the month of November easing pressures and in line with economist expectations. The Fed is widely expected to leave borrowing costs unchanged at its final meeting in 2023.

Insolvencies 

Commercial Chapter 11 filings are up 144.0% in November 2023 when compared to November 2022. Total bankruptcies were up 21.0% and small business filings were up 79.0% in the same time frame. Commercial Chapter 11 filings logged the only month over month increase at 31.0%. Overall, higher rates are impacting household spending leading to a lackluster economy and pushing bankruptcy trends upward.

State of Corporate Credit

Looking at credit in 2024, we note some challenges remain the same, but emerging issues have taken hold. The era of cheap debt has come to a halt, and we are entering a new era of higher borrowing costs and slowing economic activity. Overall, we expect credit metrics to deteriorate and organizations on the lower end of the credit spectrum will rapidly feel this strain.

Current & Evolving Credit Risks

Eroding Finances
Companies face mounting pressure from worsening interest coverage, high debt levels, and declining cash flow, all of which are negatively impacting their creditworthiness. With growth slowing, companies also anticipate lower revenue and EBITDA, further straining their finances. Recognizing the risk of deteriorating leverage over time, many are taking proactive measures, including defaults, to improve their credit fundamentals.

Distressed & Defaulting

The loan default rate has risen to 1.48% for November, which is the highest since May 2021. Refinancing has hit a 23-year high, and the debt maturity wall has become increasingly risky due to elevated rates. Looking forward at credit gauges, we believe new defaults and previous offenders will become repeat offenders in this challenging credit environment.

Intensifying Conflicts

Global tensions look to be extending into 2024, causing trade resistance among countries and leading to supply chain stress. To combat these uncertainties, more companies are looking to insurance carriers to protect their shipments or utilizing escrow services to counter geopolitical and other commercial credit risks. Overall, credit quality will be challenged as we expect volatility in commodity prices, fuel costs, and freight rates to be some of the most pressing obstacles in the new year.