According to data compiled by S&P Global for credit-rated companies, US defaults in 2020 increased 80% from the previous year, to 143 cases. Meanwhile, defaults in Europe rose 2.8 times to 42. The default rate in emerging economies, including China, increased 30% to 28 cases.
Although total defaults are still lower than in 2009, the default has exceeded 5% for the first time since 2010.
Out of 223 defaults globally, 60% were in 2 industries: energy and consumer goods.
Specifically, in the US, the JC Penney department store chain went bankrupt. In the UK, the Arcadia Group - which runs the Topshop apparel company - went bankrupt in November.
Corporate bond defaults are also widespread in China. Since November, the total amount of corporate bonds deferred or canceled has been more than 200 billion yuan (about $ 30.5 billion).
State company Shanxi International Energy recently planned to issue 3.5 billion yuan of bonds, but investors only bought 500 million yuan during the offering. Several defaults by Chinese state-owned companies, including chip maker Tsinghua Unigroup, have raised concerns among investors.
Many believe that even if the coronavirus disappears, revenue recovery in these industries will be slow.
Mr. Robert Sharps, chief investment officer of T. Rowe Price - an American investment company - pointed out that: "The process of internet commodity and mass market industries has accelerated during the pandemic". "Companies that provide infrastructure for the online economy already have a boom in demand for service," he added.
One of the reasons for the increased defaults is that corporate debt is soaring.
QUICK-Factset’s data on 34,000 listed companies worldwide that excludes the banking sector shows: In fiscal year 2020, the percentage of firms paying more interest on debt than earnings before interest and tax for three consecutive years is 26.5%. This is a record high.
In the US, the rate has increased by 0.2 percentage points from the end of fiscal 2019 to 34.5%, up 12 percentage points over the past decade.
In China, the percentage has also risen sharply to 11.0%, up 0.5 percentage points from the end of fiscal 2019.
The figure in Japan - where there were a large number of companies being overly indebted after the booming economy in the 1990s - is much lower than in the US and China, but has already exceeded 4%. the first time in 9 years.
If a country continues to support companies with over-indebtedness, those companies will become a burden on the overall economy. Growth rates of capital spending, the number of employees and profits in highly-indebted firms over the past five years have always been lower than those of less-debt companies.
The financial support for companies to deal with the pandemic is being shrinking by governments and central banks. In a report, S&P Global Rating wrote: "The focus in the second half of 2021 is likely to shift to the gradual withdrawal of extraordinary financial aid". The government and central banks need to promote business while encouraging restructuring the economy and other industries.
