The credit crunch is driving more bankruptcies and could spark a domino effect of defaults at larger firms, investment manager says
- The credit crunch could spark a domino-style effect in corporate defaults, RBA warned.
- The pullback in lending conditions has already led to a surge in bankruptcies at small, weak firms.
Tighter credit is driving a surge in bankruptcies and could spark a domino effect of debt defaults, according to Richard Bernstein Advisors.
"Beware of the coming credit crunch," RBA said in a report on Tuesday, noting the cycle of tighter monetary policy, reduced credit flows, and defaults. "Small, private, and flawed companies lead defaults of public, and seemingly financially sound companies."
The investment manager pointed to the "alarming" surge in bankruptcies at small, private, and weak firms, which has been brought on by banks pulling back on lending.
Meanwhile, repeat bankruptcies, which are firms that have defaulted on their dues a second time or more, are close to an all-time high, RBA said, growing at their fastest pace in the last few months since 2009.
The spike in defaults at small, embattled firms could spell trouble for the overall corporate ecosystem, the report added, calling small firms the "canaries in the credit mine."
In April, defaults for small private firms notched their highest level since the pandemic, according to UBS data, outweighing defaults at public firms by a factor of six.
Small- to medium-sized businesses are particularly reliant on regional bank lending, as regional lenders finance around 40% of all debt at those companies, UBS said.
That comes after the banking sector was rocked in March by the failure of SVB, which sparked a series of collapses that's made banks less willing to lend.
Banks have already pulled back on lending by the most they ever have on record, according to data from Morgan Stanley, while credit availability saw its largest drop in 20 years in an April small business lending survey.
In sum, the credit crunch could result in around $1 trillion of corporate debt defaults, Bank of America warned.