Supply chain issues continued to be blamed for pushing a number of US companies to file for bankruptcy in 2023 as the rush by corporations looking to courts to provide relief from mounting debts worsened.

While the stretch of clogged ports, long backorders and scant raw materials supply that marked 2021 and 2022 has largely passed, troubled debtors last year laid much of the blame for their financial woes on snags in their supply chains. Problems included the inability to acquire essential components and materials, oversupplied inventories and labor shortages. Appliance parts manufacturer Robertshaw US Holding Corp., automotive parts retailer PARTS iD Inc. and coffee trader Mercon Coffee Corp. all cited supply chain issues in recent bankruptcy petitions.

Companies are also being stressed by the higher interest rates and inflation, which are causing consumers to change their buying habits. Corporate bankruptcy filings tracked by S&P Global Market Intelligence reached a 13-year peak in 2023 and are continuing at a steady pace.

"Supply chain disruptions have a way of amplifying those issues, but they are seldom the only cause of it — unless something catastrophic happens, such as the loss of a critical supplier and the inability to find an alternative," Rudi Leuschner, associate professor of supply chain management at Rutgers University, said in an interview.

Ripple effects

Supply chain effects take time to show up on balance sheets and many companies have tried to use the legal system to resolve debt issues years after the pandemic-era supply shocks. The bullwhip effect, which describes small fluctuations in demand at the consumer level causing larger demand swings upstream in the supply chain, is one of the reasons for the trend, said Leuschner. Some businesses were also caught out while expanding and ended up with excess capacity after demand normalized as the pandemic receded.

"There's a ripple effect that occurs, which takes a while to reverberate throughout the economy," said Joseph Acosta, a partner at Dorsey & Whitney LLP, who focuses on bankruptcies and corporate restructuring.

Longer payment terms are also contributing to a difficult operating environment for many businesses. With suppliers receiving payments later and later, cash flow disruptions can quickly surface and become existential problems, especially for smaller suppliers of larger companies.

Combined with elevated borrowing costs, maturing debt issues and a tight labor market, companies hit by supply chain disruptions may see restructuring as their only good option.

"A disruption that lasts a couple of weeks is unlikely to be a huge source of bankruptcies by itself," said Leuschner. "But all of these factors taken together could push it over the edge."

Changing trends

One tool increasingly used in restructuring proceedings is the debt-for-equity swap, which allows lenders to relieve a company's debt burden in exchange for equity.

Recent examples of such arrangements include healthcare company Cano Health Inc., which sought bankruptcy protection Feb. 4 with an agreement to convert close to $1 billion in secured debt into a combination of new debt and complete equity ownership, and entertainment company Audacy Inc., which announced plans to equitize 80% of its debt through a deleveraging transaction with its debtholders.

"The lenders are willing to accept ownership in the company, which is a huge benefit to the company itself because they come out of bankruptcy with less debt," Acosta said. "It's also an investment for the lenders. They can turn around and sell it in the future, which many do, and realize a profit on their original loan."

In the aftermath of the supply chain crisis, many companies are increasingly rethinking and investing in their supply chains to safeguard against potential future risk events. Target Corp., for instance, has been transforming its supply chain through automation and artificial intelligence and machine learning to improve demand forecasting and inventory positioning.

"Without huge investments in stores, supply chain and tech, there is no drive-up or order pickup, which were monumental growth drivers during COVID and today," CFO Michael Fiddelke said during a Mar. 5 earnings call.

Pace of filings to persist

Absent significant changes to wage growth and inflation that could accelerate the Fed's rate cut timeline, the pace of US corporate bankruptcies is unlikely to slow significantly before the end of the year, with disrupted supply chains remaining a key risk factor.

Mentions of supply chains in the Fed's Beige Book, a summary of commentary on economic conditions throughout the US, have gradually retreated amid normalizing conditions. Supply bottlenecks were mentioned just once in its March 6 edition, compared to 11 mentions a year earlier.

Still, higher interest rates will continue to magnify the effects of existing supply chain issues for some companies as they navigate new geopolitical, financial and operational hurdles.

"Some companies have been able to refinance or stretch their finances out for a while, but that's getting harder and harder to do," said Jay Westbrook, a professor specializing in bankruptcies at the University of Texas School of Law. "If the rates don't come down pretty soon, I think we're going to see many more bankruptcies."