Hotter Than Expected Inflation and Tariff Uncertainty
Economic Update
For January, the U.S. manufacturing rate was 50.9% on the ISM Index, 1.7% higher than the December reading. This marks the first month of expansion after 26 consecutive months of contraction. The unemployment rate decreased to 4.0% in January, adding 143,000 jobs. The report shows that the U.S. labor market remains stable. The concentration of job growth was recorded in health care and government sectors, while more cyclical sectors like construction and manufacturing remained subdued.
State of Corporate Credit
Data from S&P Global Market Intelligence shows that 110 U.S. companies backed by private equity and venture capital firms filed for bankruptcy in 2024, up more than 15% from the prior year and the highest annual total on record. Some private equity firms employ aggressive financial policies, which include loading companies up with debt and prioritizing shareholder returns over operational efficiencies. As a result, companies struggle to manage their debt during times of elevated interest rates, inflation, and challenging market conditions.
Insolvencies
U.S. corporate bankruptcy filings have risen by 13% compared to last year. The trend of double- digit monthly increases in filings persists, with warning signs continuing as credit card delinquencies hit a 12-year high. Notable bankruptcies for the industrials sector in the month of January include Corsa Coal Corp., Tampa Brass and Aluminum, Prospect Foundry, Jervois Texas, and Spearman Aerospace. In Canada, business insolvencies for the 12-month period ending December 31, 2024, increased by 12.1% comparedtothesameperiodlast year.
Current & Evolving Credit Risks
Steel and Aluminum Tariffs
The U.S. has imposed a global 25% tariff on imports of Steel and Aluminum, which will go into effect on March 12th. The tariff move will benefit American steel producers, as foreign produced steel is generally cheaper than U.S. made. However, many domestic manufacturers that use metals in their factories say such duties will increase their input costs. Supply chains will also come under pressure.
Delayed Rate Cuts
Inflation for January 2025 came in at 3%, marking a slight increase from the previous month. This uptick and overall stubborn inflation are expected to delay and slow the pace of anticipated interest rate cuts throughout the year. As a result, companies hoping to refinance their debt at more favorable rates may find that opportunity slipping further out of reach. End-market headwinds and prolonged higher interest rates will put pressure on highly leveraged companies to service their debt.
Private Equity
Private equity firms are introducing measures to maintain more control over portfolio companies facing financial distress. These include modifying debt agreements to limit creditor voting rights and resisting cooperation agreements among lenders. This shift could affect restructuring plans for PE- backed companies and is something to keep an eye on. PE backed companies typically operate with substantial debt, increasing their exposure to bankruptcy risk.
