Warning Signs Emerge Around Corporate Debt

It was a hotspot for GOP tastemakers during Donald Trump’s time in the White House, but since the former president left Washington, you don’t hear much about what was once Trump International Hotel. The Trump family sold the hotel’s lease rights in 2022 for the premium price of $375 million in a deal that has turned into a boondoggle for its current owner, CGI Merchant Group. The Wall Street Journal reports that CGI has defaulted on a $285 million loan tied to the property, which it rebranded as a Waldorf Astoria.

Perhaps a luxury hotel located in the former Old Post Office building doesn’t appeal to D.C. insiders and plutocrats if they can’t use it to curry favor with the leader of the free world? It’s also possible CGI finds itself subsumed in a wave of debt defaults sweeping through corporations. (Or maybe it’s both.)

Corporate defaults skyrocketed in 2023, according to data from S&P Global Ratings, climbing 80% to 153 from 85 in 2022. Setting aside the 2020 spike in defaults due to the economic effects of Covid-19, it marked the highest default rate in seven years. And the outlook for 2024 doesn’t sound much better, with S&P estimating that roughly 40% of lower-rated issuers are facing downgrades to their ratings.

The trends in the debt markets have left some analysts fearful of what comes next as debt acquired at bargain-basement rates during the early phase of the pandemic matures. Meanwhile, government data indicates business bankruptcies are also on the rise. Per statistics from the Administrative Office of the U.S. Courts, business filings for bankruptcy increased by 40% to nearly 19,000 in 2023.

Looking for another troubling sign? More companies are including bankruptcy in their risk-factor disclosures. Data compiled using the Intelligize platform shows that disclosures related to the risk of “failure to continue as a going concern” in issuers’ quarterly reports jumped by more than 14% in the final three months of 2023 versus the prior quarter. Additionally, references to bankruptcy and liquidation concerns were up about 10% during the same period.

What are companies saying about their credit situations in these disclosures? Wynn Resorts Limited offered some details about its debt picture in a Form 10-K filed on February 23. In a section on risks related to its debt load, the casino and resort operator noted, “We are highly leveraged and future cash flow may not be sufficient for us to meet our obligations, and we might have difficulty obtaining more financing.” Moreover, Wynn said paying off its debt obligations eats into a “substantial portion” of the company’s cash from operations, limiting its ability to fund working capital and pay for other expenditures.

Kite Realty Group Trust’s latest annual report, filed on February 20, sounded even more ominous about its borrowing. The retail REIT disclosed that rising interest rates could “materially adversely affect us” and pointed out that refinancing its loans could be tough as well.

All in all, companies are telling the world in their own words that they are starting to feel a credit crunch. If you were around during the financial crisis of the 2000s, you know those messages should be taken seriously.