National investment loss lawyers KlaymanToskes reports that investors around the world are facing a debt crisis of monumental proportions, upwards of $500 billion, in a year filled with economic challenges. Several news outlets have divulged that the situation may appear typical at the surface, with companies grappling with challenges such as technological advancements and the rise of remote work that has led to vacant office buildings in major cities.
However, a more worrisome trend lies beneath the surface: an accumulation of debt during an era of remarkably low interest rates. As central banks increase interest rates and indicate a longer-than-expected duration of these hikes, the burden of debt becomes even more overbearing. Companies that took advantage of cheap credit now find themselves struggling to bear the weight.
Richard Cooper, a partner at Cleary Gottlieb, a renowned law firm specializing in corporate bankruptcies, has been witnessing the distressing effects of mounting debt on businesses worldwide. Having advised companies during past crises, including the Covid-19 pandemic, Cooper has a unique perspective on the current situation. He warns that big corporate bankruptcies are occurring at an alarming rate, second only to the early days of the Covid-19 pandemic.
Cooper emphasizes that the current debt crisis feels different from previous cycles, with a surge in defaults on the horizon. This sentiment aligns with economic data compiled by Bloomberg, which reveals a “storm” of over $500 billion in corporate debt distress already affecting global markets. The figure is expected to rise soon, with concerns deepening on Wall Street about the potential slowdown of economic growth and the strain it may place on credit markets, which are just beginning to recover from their most severe losses in decades.
Recently, non-financial Chinese companies experienced a surge in debt relative to the size of their economy, while in the US, high-yield bonds and leveraged loans owed by riskier businesses more than doubled to reach $3 trillion by 2021. Europe saw a 40% increase in junk-bond sales in the same year, contributing to a $785 billion wall of debt coming due in the near future.
The potential impact of the debt crisis is exacerbated by cooling growth in China and Europe, along with the anticipated continuation of interest rate hikes by the US Federal Reserve. The result may prove insurmountable for some businesses, as the Americas have witnessed a staggering 360% surge in troubled bonds and loans since 2021. Should this trend continue, it could trigger the first widespread cycle of defaults since the Great Financial Crisis.
The process has already begun, with over 120 major bankruptcies in the US alone this year. However, the data indicates that less than 15% of the nearly $600 billion in debt trading at distressed levels globally has actually defaulted. This suggests that companies owing over half a trillion dollars may struggle to repay their debts or face significant challenges in doing so.
While the US economy has demonstrated surprising resilience in the face of higher borrowing costs, and the gradual slowdown in inflation fuels speculation of a soft landing guided by the Federal Reserve, even a modest uptick in defaults would pose an additional challenge.
As defaults rise, investors and banks may reduce lending, further straining distressed companies as financing options dwindle. Bankruptcies would inevitably lead to layoffs, putting pressure on the labor market and impeding consumer spending.
Richard Cooper predicts that certain sectors, such as retail, may become untenable despite attempts to rectify balance sheets. The post-pandemic reality has exacerbated the struggles of commercial real estate, as the slow return to offices has resulted in empty buildings and desolate downtowns. Approximately $168 billion, over a quarter of the distressed debt worldwide, is linked to the real estate sector, surpassing any other single industry.
The real estate debt crisis is further fueled by China’s real estate bust, as evidenced by the restructuring efforts of China Evergrande Group, which have caused the prices of debt from other major companies, like Dalian Wanda Group Co. and Country Garden Holdings Co., to plummet. In the US, WeWork Inc., the co-working giant, struggles with bonds due in 2025 that currently yield around 70%.
The private equity sector has also been impacted by rising rates, as companies dependent on consumer spending have been struck by the debt crisis. Many private equity firms capitalized on easy credit by acquiring companies, borrowing from Wall Street, and implementing cost-cutting measures for profitability. However, the firms left these companies deeply indebted, often with floating-rate loans.
While interest rates remained near zero, the risks were disregarded, leading to a lack of hedging against rate hikes. Consequently, the surge in floating-rate loan interest has pushed many of these companies to the brink of collapse. Over $70 billion of debt from private equity-owned firms is currently trading at distressed levels.
KlaymanToskes has been advocating for investors’ rights for decades, from the limited partnership debacle of the 1990’s, to the Tech Bubble in 2000, through the Mortgage Crisis in 2008, and the Puerto Rico Government Debt Crisis in 2013, the Covid Market Crash of 2020 and current bond market cases. KlaymanToskes has assisted investors in the recovery of more than $250 million in FINRA arbitration cases alone.
Our firm has represented clients throughout the world that maintained accounts with U.S. brokerage firms, including individual, high net-worth and institutional investors such as non-profit organizations, unions, and public and multi-employer pension funds.
If you suspect you may have been a victim of fraud, misconduct, or other securities violations, and/or have suffered losses at the hands of your brokerage firm, stockbroker or financial advisor, contact Lawrence L. Klayman, Esq. at (888) 997-9956 or lawrence@klaymantoskes.com for a free and confidential consultation to discuss your potential case.
KlaymanToskes is a leading national securities law firm which practices exclusively in the field of securities arbitration and litigation on behalf of retail and institutional investors throughout the world in large and complex securities matters. The firm has recovered more than $250 million for investors in FINRA arbitrations and over $350 million in other securities litigation matters for its clients. KlaymanToskes has office locations in California, Florida, New York, and Puerto Rico.
KlaymanToskes, P.A.
Lawrence L. Klayman, Esq.
888-997-9956
lawrence@klaymantoskes.com
www.klaymantoskes.com