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Business Debt Default and Delinquency Rates During the Pandemic
Business Debt Default and Delinquency Rates During the Pandemic
The COVID-19 pandemic has had a profound impact on businesses of all sizes. With lockdowns, reduced demand, supply chain disruptions, and other challenges, many companies have struggled to stay afloat. This has led to concerning trends in business debt delinquencies and defaults. In this article, we’ll take a closer look at how business debt performance has been impacted since early 2020.
Delinquency Rates on the Rise
One clear trend that emerged early in the pandemic was an increase in delinquencies on business loans and debt obligations. Delinquency refers to when a scheduled payment on a loan or debt is late or missed entirely. As businesses experienced sharp revenue declines in early 2020, many struggled to meet their regular debt payments.
Data from the Federal Reserve shows that business loan delinquencies saw a marked increase in the second quarter of 2020. The delinquency rate on commercial and industrial loans made by commercial banks rose from 1.5% in Q1 2020 to 2.2% in Q2 2020. This was the highest delinquency rate observed since the Great Recession back in 2009.
The rise in delinquencies was especially acute in sectors directly impacted by lockdowns and reduced activity, like retail, restaurants, and hospitality. For example, data from Trepp showed the delinquency rate on retail commercial mortgage-backed securities (CMBS) shot up to 10.3% in June 2020, compared to just 4.7% in March.
While delinquencies moderated somewhat as businesses adapted, rates remained elevated compared to pre-pandemic levels throughout much of 2020 and into 2021. As of Q1 2022, the delinquency rate on bank C&I loans was still 0.60 percentage points above its 2019 average.
Business Bankruptcies Also Increased
In many cases, delinquent business loans eventually end up in default. Default occurs when a borrower can no longer meet their debt obligations and stops making payments altogether. Default significantly increases the risk that a lender will incur losses.
Not surprisingly, business bankruptcies saw an uptick during the pandemic as well. According to data from Epiq AACER, commercial Chapter 11 bankruptcies rose 29% year-over-year in 2020. The accommodation and food services sector experienced the largest increase at 43%. However, the bankruptcy wave was not as severe as some initially feared. In fact, the 2020 commercial bankruptcy figures remained below recessionary levels seen in prior downturns. Government relief efforts likely helped limit bankruptcies to some degree.
Uneven Recovery Leaves Some Sectors Vulnerable
While emergency federal policies provided vital support, not all industries have rebounded equally as the economy emerges from the pandemic.
Sectors like restaurants, travel, and entertainment continue to face challenges due to changes in consumer behavior and lingering COVID-19 impacts. Commercial real estate firms have also been dealing with lower occupancies and delayed returns to offices.
According to data analytics firm Trepp, the delinquency rate on lodging CMBS reached nearly 25% in summer 2021, while the retail CRE delinquency rate remained close to 10% .
These struggling sectors could see additional stress in their loan performance as federal support programs wind down. However, the hope is a continued broader economic recovery and strong labor market will limit excessive fallout.
The Path Ahead
The COVID-19 pandemic clearly exacerbated vulnerabilities in segments of the business debt landscape. However, due to the nature of the crisis and extensive federal intervention, mass defaults were largely avoided.
As the economy enters a post-pandemic normal, the trajectory of business loan performance will hinge on the strength of the recovery. Sectors under the most prolonged strain will need to continue adapting their business models.
Banks and creditors will also have to strike the right balance between maintaining credit discipline and working with viable firms still getting back on their feet. How these dynamics play out will determine if business debt distress remains contained or begins to spike anew.