This is what the Fed's interest-rate cut means for distressed companies

By James Rogers

This week's aggressive Fed rate cut could provide some breathing space for distressed companies, notes one bankruptcy attorney

The Federal Reserve's aggressive interest-rate cut this week could provide some breathing space to distressed companies, according to Howard Ehrenberg, a partner at law firm Greenspoon Marder's bankruptcy and reorganization practice.

The Fed announced its historic 50-basis-point rate cut on Wednesday, with the central bank choosing the larger of the two options that were on the table.

"I think that it will marginally assist in borrowing money to try to cover debt," Ehrenberg told MarketWatch. "[Distressed companies] could probably borrow money at slightly cheaper rates to keep going for a while."

Related: A Fed rate cut with the stock market at a record high? Here's what history says

Still, Ehrenberg added, the rate cut likely isn't "helpful to the point where it will avoid a company sliding into liquidation or reorganization."

Earlier this week, Tupperware Brands Corp. (TUP) filed for bankruptcy protection after years of declining demand and increasing competition. Tupperware had attempted a turnaround and announced a new chief executive and a "board refreshment" last year, but continued to face stiff challenges. In May, the company delayed its annual report, citing trouble retaining accountants.

Ehrenberg, who is not involved in the Tupperware bankruptcy, said that he wasn't surprised by the demise of the food-storage and kitchenware brand. "Tupperware is a great American product, but for so long now, many decent quality competitors exist out there," he noted. "It looks like it's going to be sold - I don't know to whom."

Related: After Fed rate cut, the next 6 months will be crucial for investors. Here's why.

U.S. bankruptcy filings spiked in August after a slowdown in July, according to data released last week by S&P Global Market Intelligence. The total number of bankruptcy filings in the first eight months of 2024 hit the highest level since 2020, S&P Global Market Intelligence said, and was also the second-highest number since 2010.

Solar-technology provider SunPower Corp. (SPWRQ), perfumes and cosmetics wholesaler Avon International Operations Inc. and gas-station and convenience-store operator SQRL Service Stations LLC were among August's 63 bankruptcy filings, up from a revised 49 in the prior month. Those three companies alone reported more than $1 billion in liabilities.

Related: U.S. bankruptcy filings spiked in August after slowdown in July

Ehrenberg said he thinks the Fed's interest-rate cut this week was "made prematurely" - given that inflation has yet to come down to the central bank's stated 2% annual target - "and probably because the Fed knows that the economy is weak, so they are making an interest-rate cut to try to stimulate demand."

The Fed this week predicted that inflation in the U.S. is on track to slow to its 2% goal in 2026.

-James Rogers

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09-21-24 1119ET

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