Substantial Increase In Business Bankruptcies Likely: Euler Hermes ACI

Business bankruptcies continued a relentless upward pace in the first quarter of 2008, and data suggests that the trend could increase even further as the year progresses, according to analysis from leading B-to-B accounts receivable insurer Euler Hermes ACI.

Date from the Administrative Office of the U.S. Courts showed the number of businesses seeking bankruptcy protection rising 39% over the past four quarters compared to the previous four. On a year over year basis, filings have grown for five consecutive quarters at an average rate of 42%, stated Euler Hermes ACI Chief Economist Dan North.

“There is little doubt as to why there has been such a rapid increase in business bankruptcies – it’s the same combination that’s been repeated so often recently: high energy prices, weak consumers, job losses, and the credit crunch,” he said. “These forces are likely to continue for some time and to put increasing pressure on bankruptcies.”

To get a better idea of how bankruptcy filings will evolve, North pointed to the Federal Reserve’s quarterly Senior Loan Officer Opinion Survey for some insight into the future. The survey asks respondents from larger banks a range of questions about lending conditions, such as whether the bankers are increasing or decreasing spreads. Historically, when the net percentage of respondents who are increasing spreads for loans to smaller businesses exceeds 20%, bankruptcies usually rise the following quarter. “In fact they rise three quarters of the time at an average increase of more than six percent,” said North.

In April, though, North said that net percentage of increasing spreads was “nowhere near 20%; it had skyrocketed to a record-setting 63.6%, strongly suggesting that bankruptcies for smaller companies are very likely to rise next quarter.” The previous record increase had been 41.8%. Additionally, large companies didn’t fare any better, as the net percentage of banks increasing spreads on those loans also set a record of 71%, well above the previous record of 59%, said North.

Other questions in the survey asked about lending conditions, which can also correlate well with bankruptcy activity. “When asked if they were tightening lending conditions to small firms, a net percentage of 51.8% of the bankers responded yes, just behind the record of 52.6%,” he commented. And for large firms, the net percentage was 55.4% – the third highest ever.  

“Clearly the Fed survey shows just how difficult the bank loan market currently is,” he concluded. “When bank financing becomes very difficult, it adds just one more pressure to the challenging conditions businesses are currently facing. The Fed survey’s correlation with future bankruptcies lends substantial evidence on top of record high gas prices (inflation adjusted), a deteriorating job market, and a sputtering credit market, that businesses are looking at tough times ahead, and that business bankruptcies are very likely to increase, perhaps substantially.”

Euler Hermes ACI is North America’s oldest and largest provider of trade credit insurance and accounts receivable management solutions and is the US subsidiary of the Euler Hermes Group. Headquartered in Owings Mills, MD, the company protects and insures more than $150 billion in US trade transactions annually. Additionally, Euler Hermes ACI provides a suite of receivables management services that includes commercial third party collections, receivables management outsourcing, and international collections. For more information, visit www.eulerhermes.com/usa.