By Sarah Chaney Cambon

Business bankruptcies are rising briskly. What's even more worrisome: Many of the troubled companies are large.

Corporate behemoths including SVB Financial, Bed Bath & Beyond and Yellow sought chapter 11 bankruptcy protection this year. The filers blamed elevated inflation, higher interest rates, waning government aid and lingering supply-chain disruptions. More corporate filings are likely on the way as high interest rates push big companies over the edge.

While any type of bankruptcy signals distress, large-business bankruptcies carry particularly significant economic risks. They can send a chill through financial markets, involve tens of thousands of job losses or, in the case of Lehman Brothers in 2008, remove all doubt that an economic downturn is under way.

Indeed, the collapse of trucking company Yellow this summer reverberated across the economy, from domestic shipping and real-estate markets to Wall Street.

To be sure, the rise in business bankruptcies is a far cry from the 2008 financial crisis or the 2020 pandemic downturn, when widespread layoffs led to economic pain. Big-business bankruptcies were unusually low last year, so some of the increase reflects a normalization.

The economy is still growing as consumers splurge and businesses snatch up workers. Employers added a surprisingly robust 336,000 jobs in September, with hiring widespread across industries.

But big chapter 11 filings -- which, by one estimate, tripled in the first half of this year compared with the same period last year -- come alongside rising economic risks. Households are running down pandemic savings, banks are pulling back on lending and bond yields are surging, all of which could curtail growth.

The rise in corporate bankruptcies "is a worrying sign for the outlook," said Stephen Brown, deputy chief North America economist at Capital Economics. "Businesses that go bankrupt still have to cut costs, they still have to probably lay off workers."

The unemployment rate held at 3.8% last month, up from half-century lows of 3.4% logged earlier this year. And while job growth overall remains strong, there are indications that it is weaker at big companies than small ones. Payroll-processing company ADP, which conducts its own tally of monthly payrolls, said large private companies shed 83,000 jobs in September. Employment at these larger companies is down by 150,000 from January.

"Mega bankruptcies," or those filed by companies with more than $1 billion in assets, hit 16 in the first half of this year, surpassing the comparable half-year average of 11 from 2005 through 2022, according to consulting firm Cornerstone Research. SVB Financial Group, the parent company of Silicon Valley Bank, was the biggest corporate bankruptcy, with nearly $20 billion in assets at the time of its filing, Cornerstone said.

SVB's financial distress quickly spread, creating heightened fears of a recession and forcing the Federal Reserve to step in to reassure markets. The SVB collapse triggered a pullback in bank lending that continues to pose an economic threat.

Consumers likely noticed Bed Bath & Beyond stores closing in local shopping centers, after the company filed for bankruptcy and announced plans to close stores across the U.S.

Yellow, one of America's largest trucking companies, filed for bankruptcy this summer. The company's shutdown translated to a loss of some 30,000 jobs, the single largest at a company since Boeing at the end of 2020 announced it would cut its workforce by around 30,000, according to Challenger, Gray & Christmas, an outplacement-services firm.

Job cuts across the U.S. remain historically low. The trajectory of the labor market remains key to whether the Fed can bring down inflation to its target of 2% without causing a recession, a so-called soft landing.

With inflation falling, many economists are more hopeful that a soft landing can occur than they were at the start of the year. Others, though, aren't so sanguine.

More bankruptcies, along with a weakening stock market and rising credit-card delinquencies, suggest the U.S. economy is heading for a recession, said Steven Blitz, chief U.S. economist at GlobalData TS Lombard. He thinks a downturn will still be far less severe than the 2007-09 recession.

"You're not going to see the kind of bankruptcies and balance-sheet stress that you saw during that period," Blitz said. The recent rise in bankruptcies doesn't mean "the economy is heading into some doom-death loop."

Chapter 11 filings have risen during periods of growth, at times indicative of turmoil concentrated within industries rather than widespread weakness. Such was the case in 2015 and 2016, when a slump in oil prices drove a wave of oil-and-gas bankruptcies, but the U.S. economy grew steadily.

Big businesses that loaded up with debt when interest rates were extremely low are among the most vulnerable as the economy slows and interest rates remain high.

"Companies have been surviving the past few years by taking advantage of the ultralow interest rates," said Amy Quackenboss, executive director at the American Bankruptcy Institute. "But many of these corporations are seeing those loans come due now, and they're struggling to refinance because the interest rates now are significantly higher."

Aircraft-leasing company Voyager Aviation Holdings attributed its bankruptcy filing this summer, in part, to higher interest rates.

Other companies that took out floating-rate debt are particularly vulnerable to default as loan costs rise, said Nick Kraemer, head of ratings performance analytics at S&P Global Ratings.

Petco is one such business. Moody's reduced Petco's rating further into speculative territory this summer. The pet-products retailer took out a $1.7 billion loan two years ago at an interest rate around 3.5%. Now it pays almost 9%.

Debt reduction is one of Petco's three key capital-allocation initiatives, Chairman Ronald Coughlin said on the company's August earnings call.

Write to Sarah Chaney Cambon at sarah.chaney@wsj.com

(END) Dow Jones Newswires

October 08, 2023 05:30 ET (09:30 GMT)

Copyright (c) 2023 Dow Jones & Company, Inc.