For retailers to file for bankruptcy pre-holidays suggests a tremendous struggle: retail expert
Private U.S. companies are seeing their earnings and profit margins collapse after the Federal Reserve’s rate hikes have lifted financing costs, and are increasingly going broke, according to a new report.
Larger companies have been mostly insulated from the pain so far. But these corporations often use mid-sized private firms as suppliers, and the failure of smaller businesses could disrupt supply chains and boost costs for bigger enterprises, according to the report from Marblegate Asset Management and Rapid Ratings on Monday.
“The water looks fine from the shore but what’s happening underneath the surface is a very very troubled environment that is very dangerous,” said Andrew Milgram, managing partner and chief investment officer at Marblegate.
Any weakness among private companies could hit investors in one of the fastest growing parts of debt markets: private credit lenders. These money managers oversee around US$1.6 trillion of direct loans and other forms of private credit.
The struggles at smaller companies could create opportunities for professionals that help companies restructure their debt and turn themselves around, Milgram said.
Marblegate and Rapid Ratings looked at about 1,200 private companies with revenue between $100 million and $750 million, as well as about 2,230 publicly traded companies with revenue of $750 million or more.
The private companies saw a measure of their income, earnings before interest, taxes, depreciation and amortization, fall more than 20 per cent between 2019 and 2022. At larger public corporations, Ebitda grew nearly 20 per cent on average. Profit margins contracted among the smaller companies, and expanded at the bigger firms.
That profit pressure has resulted in more companies collapsing. Bankruptcy filings rose by more than 250 per cent in 2023 from the year before, driven mainly by smaller companies, according to the report.
Privately held companies are more vulnerable to weakening demand, higher wage inflation, and rising funding costs, according to the report. The firms generally have less control over their expenses than their large counterparts, and many don’t have the power to pass higher costs on to customers, because competition is too intense.
“Middle market companies have less control over prices. If you raise prices on Walmart, they’ll just find a new supplier,” Milgram said.