Why company defaults are creeping up

The post-pandemic corporate default cycle is arriving through an unfamiliar channel. In previous downturns, bankruptcies were precipitated by sudden revenue collapses or covenant breaches enforced by strict bank lenders. Today, corporate revenues remain superficially supported by nominal price inflation, and covenant-lite loan agreements offer borrowers wide operational latitude. Instead, defaults are grinding higher through the relentless pressure of floating-rate interest expense.

The Floating-Rate Trap

With benchmark policy rates lingering above five per cent, leveraged borrowers who loaded up on floating-rate debt during the easy-money era are running out of working capital. Interest coverage ratios have deteriorated from comfortable cushions to fractional survival levels. Companies are not failing because business has evaporated; they are failing because every penny of operating cash flow is being incinerated by debt service.

The modern corporate default cycle is not a crisis of vanishing demand, but a quiet, balance-sheet war of attrition waged by higher base rates on unhedged leverage.