Key Points

• ARC has observed a historically unusual phenomena – decreasing bankruptcy rates during an economic downturn, post negative economic shock facilitated by the Covid-19 pandemic.
• This phenomena can be largely explained by historically massive subsidy packages issued by governments, to help the corporate sector weather the pandemic.
• Now that the generous subsidies have come to an end, bankruptcy rates have been on the rise, further exacerbated by sharply increasing interest rates, applying further pressure on the liquidity.
• Historically, US data suggests that corporate bankruptcies/defaults peak on average of 2 years after interest rates peak. However, ARC believes that this time they may come sooner than expected.
• Companies that do not have interest rate hedging contracts in place, will lose the most both now and in upcoming months, as well as those that failed to obtain securities under fixed interest rates prior to 2022 when they were relatively low.