Revlon declares bankruptcy. Are other faults on the way?

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Cosmetics company Revlon has filed for Chapter 11 bankruptcy. There could be more defaults for US companies.

The time of dreams

With fears that a recession is looming, there could be more defaults for U.S. businesses as the macroeconomic environment deteriorates, S&P Global warns.

Indeed, the New York-based cosmetics company

Revlon

filed for Chapter 11 bankruptcy on Thursday, one of the first major companies to do so amid a global slowdown in corporate default activity.

The United States saw a 40% drop in year-over-year delinquencies throughout the year, according to data released by S&P Global. Only 15 companies have filed for bankruptcy this year so far, compared to 25 during the same period in 2021 and 66 in 2020, according to S&P Global.

Revlon

(teleprinter:

ROUND

) may be the canary in the coal mine, heralding an increase in the number of companies that will not repay their debts in the near future. The company said its capital structure has limited its ability to navigate a difficult macroeconomic environment. Revlon expects to receive $575 million in debtor in possession financing from its existing lender base.

Over the past month, the US distress ratio, or the level of risk the market has priced into bonds, has nearly doubled from 2.4% to 4.3%, according to data from S&P Global. Although the ratio is well below the five-year average of 8.3%, the month-to-month change is the highest since March 2020, indicating that the United States could start to see delinquencies increase , analyst Nicole Serino wrote in a research note on Thursday.

Default rate spikes tend to be closely associated with recessions, and there’s usually an escalation in defaults as the economy rushes into a recession, said Martin Fridson, chief investment officer of Lehmann Livian Fridson Advisors. .

And yet, based on the relatively low distress ratio, it may be too early to worry about corporate failure. The ratio is far from 30%, the level to which it climbs during a recession. He pointed to the fact that most US rating agencies remain relatively optimistic. Fitch Ratings, for example, updated

American Steel’

s (symbol:

X

) credit earlier this week, a move the agency might have been hesitant to make if it thought the economy would slip into a recession within a month.

“If default rates go up a lot soon, someone forgot to tell investors about it,” Fridson said.

That said, if the distress ratio continues to accelerate at the rate indicated by S&P Global, it could lead to “more worrying numbers before long”, he added. As macroeconomic conditions continue to change, Fridson recommended investors monitor a company’s ability to generate cash flow to service its debt. It’s also worth monitoring if a company is missing earnings expectations for several quarters in a row, or if the company is struggling to secure short-term funding, Fridson said.

Write to Sabrina Escobar at [email protected]

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