The Rising Financial Distress in Florida and Texas: Implications for Regional Credit Risk and Investment Strategy

In Q2 2025, Florida and Texas—two of the nation's most populous and economically significant states—have emerged as epicenters of financial distress. According to WalletHub's latest analysis, Texas ranks as the most financially distressed state, while Florida follows closely at No. 2. These rankings are driven by deteriorating credit health, surging bankruptcy filings, and a growing share of households with accounts in forbearance or deferred payments. For investors, this crisis presents both risks and opportunities.

Credit Market Vulnerabilities: A Perfect Storm

The financial strain in these states is not merely anecdotal. Texas residents saw a 22% increase in non-business bankruptcy filings between March 2024 and March 2025, the sixth-highest rate in the U.S., while Florida's residents experienced a 23% rise in distressed accounts—the second-highest. These trends are compounded by low credit scores: Texans had the ninth-lowest average credit score in Q1 2025, and Floridians were not far behind.

The implications for credit markets are profound. As interest rates normalize after years of high inflation, highly leveraged companies in Texas and Florida—particularly in energy, real estate, and tourism—face heightened default risks. For example, Texas's energy sector, long reliant on capital-intensive infrastructure, is vulnerable to valuation declines amid the global energy transition. Similarly, Florida's real estate and tourism industries, which depend on discretionary spending, are exposed to macroeconomic shocks.

Municipal bonds in these states also warrant scrutiny. While Texas and Florida have historically been seen as credit-safe due to their robust economies, rising defaults among local governments and developers could erode this reputation. Investors should monitor credit spreads for Texas and Florida-based issuers, as widening spreads may signal growing default probabilities.

Defensive Investment Opportunities: Navigating the Storm

Despite the risks, the crisis in these states creates fertile ground for defensive investors. Three key strategies stand out:

1. Private Credit and Direct Lending
   As traditional corporate debt markets falter, private credit managers are stepping in to fill the gap. Direct lending, which offers yields of approximately 9.9% in 2025 (compared to 7.2% for high-yield bonds), is particularly attractive in Texas and Florida. These states' asset-backed opportunities—such as real estate and infrastructure debt—allow investors to diversify risk while capturing higher returns.

2. Opportunistic Infrastructure Investments
   Texas's energy transition and Florida's climate resilience initiatives are driving demand for infrastructure projects. In Texas, renewable energy and battery storage infrastructure are gaining traction, offering stable cash flows. In Florida, investments in hurricane-resistant construction and flood mitigation systems are becoming critical. These sectors align with long-term trends and offer defensive characteristics.

3. Liability Management Transactions
   With many companies in Texas and Florida facing debt maturities, liability management deals—where new senior debt replaces high-yield obligations—are proliferating. These transactions can yield strong returns by capturing both yield and principal recovery. Investors with expertise in restructuring should prioritize opportunities in energy, real estate, and tourism.

Conclusion: Balancing Risk and Reward

The financial distress in Texas and Florida is a double-edged sword. While rising defaults and credit spreads pose risks, they also create opportunities for investors who can navigate the complexities of distressed markets. By focusing on private credit, infrastructure, and liability management, defensive investors can capitalize on undervalued assets while mitigating exposure to volatile sectors.

For those willing to act decisively, the key is to remain agile and selective. The next phase of the credit cycle may favor those who recognize that distress, when managed strategically, can be a catalyst for long-term gains.