Follow The Money

Are?Increasing Corporate Defaults Signaling an Impending Recession?

(Originally appeared in the September 20th, 2023?'Across the Board'?digital publication, a Board Director, Board Advisor, C-Level, and Business Leader publication reaching 40,000+ exceptional business leaders in over 70 countries with articles focused on leadership, strategy, and governance topics - sign up?here)

Board?Directors are typically on a constant search for data and trending?to assist in their guidance of the organizations they are entrusted to govern. Without attempting to state the obvious, "rightfully so!" Data, trending, and history are great inputs for defining and solutioning current challenges all organizations face.

As Boards of Directors navigate the complexities of an increasingly?linked global economy, one challenge that looms ever larger is the elevating chance of a global recession, becoming more apparent with the?increasing tide of corporate defaults building globally?throughout 2023.?From experienced Board Directors to aspiring ones, understanding the critical role a Board plays during these challenging times is very important, with deep understanding of?essential focus areas when corporate defaults surge

....But we first have to ask ourselves,?have we learned anything from the numerous financial crises throughout modern times? What about the financial crisis of 2008/2009? The hardships experienced during the height of COVID-19? The jury is still out on this one, but the initial observations are not promising.

Corporate defaults are currently at their highest?level since the global financial crisis - credit rating agency S&P Global has recently?released data showing corporate defaults in August 2023 were the highest since 2009. "The global corporate default tally jumped to 107 as of August?31, 2023?with 16 defaults in August" alone, the report states.?S&P Global "now expects the U.S. and European 12-month trailing speculative-grade default rates to continue to rise from current levels to 4.5% and 3.75% respectively, by June 2024." According to Goldman Sachs,?$800 billion of investment-grade, high-yield and leveraged loans are maturing in 2024 which will need to be refinanced at higher interest rates. With this worrisome news and trending, interest rates are once again showing their ability to make drastic impacts across entire economies.

Corporate defaults can send shockwaves through financial markets, impacting shareholders and stakeholders at every level. ?

Corporate Default: A failure of an organization or company to meet the legal obligations or conditions of a loan. Default can be of two types: debt services default or technical default. Debt service default occurs when the borrower has not made a scheduled payment of interest or principal. Technical default occurs when an affirmative or a negative covenant is violated (the most commonly violated restrictions in affirmative covenants are tangible net worth, working capital/short term liquidity, and debt service coverage)

Board Directors are at the forefront of safeguarding the interests of shareholders, employees, and the broader investment community. If experienced in a company you lead, a default can quickly erode trust, tarnish reputations, and usher in financial losses. Therefore, being well-prepared and proactive in addressing these challenges is crucial for the sustainability and success of any organization.

The ability to predict, or at the very least identify, increased risk of default is quite useful in defining the health of your organization, competitor organizations, industries, and overall economies.?Be aware of specific financial instances that might be considered a default?or could be considered omens for significant financial issues potentially leading to default:

• Failure to make on-time?principal or interest payments on secured debt.
• Missed payments for raw materials,?supplies,?royalties, commissions,?and similar unsecured operating liabilities.
• Failure to make timely payments on unsecured bonds and notes.
• Violations of indenture agreements.
• Common industry suppliers experiencing cash flow issues.
• Disclosures regarding how continued?interest rate increases may or will?negatively affect the?organization.
• Downgraded issuer credit ratings (S&P, Moody’s, Fitch, etc.)

As corporate defaults become more prevalent in today's immediate business landscape, Boards of Directors should dig deep into the details of peer and otherwise unrelated instances to learn from them. How did the issues start? Was there a specific risk the studied organization was willing to overlook? What were the preparedness levels of strategic planning, financial oversight, crisis management, stakeholder engagement, governance structure, and legal counsel? Learn from the answers to these questions to proactively?prepare your organization.?

Talk of a global recession has been common for years now, and?many leaders seem to be immune to the?"cry wolf" scenario at this point. Remain?vigilant, however, as this?latest traunch of negative news is telling you something very important. Many companies are struggling. Entire industries are feeling pressures. Governments have all but exhausted their tools in an effort to contain the pathogen, in some cases passing the point of helpfulness and entering the exacerbation phase.?All of this is indeed leading somewhere and your organization needs to be prepared should markets and economies not experience the optimistically-predicted so-called "soft landing"?(a cyclical slowdown in economic growth that avoids recession)?parroted by many prognosticators.

Increasing corporate defaults are indeed one of many indicators pointing towards financial difficulties ahead, and?I am sure you could add a few more to the discussion. Just remember -?a well-prepared Board of Directors can transform challenges into opportunities and lead their companies to stability.

Are you?following the money?

Reach out?to learn more?through?our Board Director Education & Certification program, plus?Consulting &?Advisory?offerings,?and?International Speaking Tour topics.

Mark A. Pfister - Non-Executive Director |?CEO |?Chief?Board Consultant?| Corporate?Strategist | Board Macro-Influencer?| Speaker?| Author www.PfisterStrategy.com

About the Author: With a strong focus in Strategy, Governance, and Technology / Cybersecurity, Mark A. Pfister is CEO & Chief Board Consultant of M. A. Pfister Strategy Group, an executive advisory firm that serves as a strategic advisory council for executives and Boards in the public, private, nonprofit, and private equity (PE) sectors. He is also Chairman & CEO of Integral Board Group, a specialized Board services &?consulting company, as well as Founder & CEO of the International Board Director Competency Designation (IBDC.D) education and certification program, a Board Director certification course recognized globally. Mr. Pfister is a 'Board Macro-Influencer' and his success has been repeated across a wide range of business situations and environments. He prides himself on being a coach and mentor to senior executives and Directors. In Board Director circles, Mr. Pfister has earned the nickname 'The Board Architect’..............<< read full bio here >>

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