Bill Chepell | Chicago, Illinois

Higher Risk Companies – be ready for economic downturns

Companies which default/file for bankruptcy typically fall into one of the following categories:

  1. Riskier industries – this includes industries experiencing structural changes such as retail and to a lesser extent, healthcare.  Then, there are cyclical industries such as leisure and energy/natural resources.  The S&P breakout below provides historical context.
  2. Leveraged company entering a recession –The grid below reflects the default spikes during recessions.  It is unsettling as speculative grade issues commonly exceed 10% default rates during economic downturns. Leveraged firms in cyclical industries are typically speculative grade. 

Finally, the following grid reflects the general rise in debt on corporate balance sheets over the past decade. This is a potential concern in the future.