Economic indicators are pointing to a second wave of bankruptcy for businesses of all sizes as well as households, likely to hit in the second half of next year, according to Ed Altman, the finance professor and bankruptcy guru, WSJ Pro Bankruptcy reported.A number of signs suggest a coming surge in defaults for nonfinancial companies, which picked up with the onset of the COVID-19 pandemic but have been somewhat muted thanks to unprecedented support for financial markets from the Federal Reserve. Chief among the indicators pointing to another bankruptcy wave ahead is the ratio of nonfinancial corporate debt to gross domestic product, which spiked to an all-time high of close to 57 percent in the first half of 2020, Altman said. Between 1985 and January 2020 that ratio never climbed above 47 percent, according to data presented by Mr. Altman, a professor at New York University’s Stern School of Business. “Every time we had a spike in the ratio of nonfinancial corporate debt to GDP, we also had a spike in default rates within 12 months to crisis levels,” he said. Corporate default rates followed that pattern in the past four recessions, including those that occurred in 2008-2009 and 2000-2001. Crisis-level default rates are around 8 percent to 10 percent or more, according to Altman, known for inventing the so-called Z-score, a mathematical formula used to predict corporate bankruptcies. Altman forecast that default rates for nonfinancial companies will reach 7.5 percent by the end of 2021 from less than 6 percent currently. That compares with 2.7 percent at the end of 2019 and the historical average for corporate defaults of 3.3 percent.
