Edward Altman

A combination of higher interest rates, stubborn inflation and companies dealing with huge debt loads piled up during the easy money era have resulted in one of the busiest periods for corporate bankruptcies in quite some time.

NYU professor Edward Altman, who's best known for the Altman Z-score, a popular tool for predicting bankruptcies, recently told NPR in an interview that corporate zombies are on the rise and that he predicts bankruptcies will get worse in 2024 when an enormous amount of corporate debt comes due and companies are facing difficulties trying to refinance or pay off that.

debt.

The reasons for rising bankruptcies vary around the world.

The probability of bankruptcy, I have a shot of estimating, and I have a shot of estimating it because I've estimated the synthetic rating for your company at each debt ratio.

Remember how we used the interest coverage ratio? The reason that helps me, is Ed Altman, who I think he's still teaching, right? One class a year now.

But basically, for the last 25 years, he's actually taken companies in different bonds and different ratings classes and assessed the likelihood that a bond will default if it's AAA rated, AA rated.

So there's actually a table where if you tell me what your rating is, I can tell you the likelihood that you will go.

And these out-of-court solutions, they've been taking a massive amount of market share from in-court solutions over time.

Ed Altman from NYU, he did a study on this.

Last year, two-thirds of defaults in BSL were these out-of-court exchanges, where a decade ago they were only 10% of defaults.

So in my mind, this really has a lot to do with these erosion of covenants.