VideoCorporate America's financial health is deteriorating. The signs are hard to ignore:
The percentage of syndicated, high-risk bank loans is rising rapidly, topping 5.72 percent in the second quarter.
This compares with 3.25 percent in 2000 and only 1.25 percent in 1998, reports The Wall Street Journal, citing data from several federal regulators.
On Monday, Moody's Risk Management Services reported the average probability of a debt default over the next year by a North American company increased to 4 percent in September, up from 2.9 percent during the same month a year earlier. If that prediction is accurate, 284 companies in the U.S. and Canada will miss payments on loans, bonds, or other debt securities between now and the beginning of September 2002.
Surprisingly, Moody's notes that the probability of default by weaker companies fell slightly from March 2001--but is still way above the probable default rate during the recession of 1990.
Moody's RiskCalc methodology defines "weaker companies" as the upper 25 percent of the total universe of companies with the highest probabilities of default. It says this roughly corresponds to bond issuers with speculative-grade ratings.
Which industries have the highest probability of default? The communications sector leads the pack, followed by high-tech businesses, retail-wholesale companies, and manufacturers.
Conversely, Moody's says the risk of debt default is lowest for utilities, food products companies, and mining operators.
"Default risk is continuing to rise as firms remain pressured by high indebtedness, poor earnings prospects, and volatile equity markets," notes David Hamilton, Moody's default analyst and principle author of Moody's default research. "The improvements we were expecting to occur later this year and early next may be delayed by an exacerbated economic slowdown."
Going Under Going Up
Meanwhile, the number of businesses expected to file for bankruptcy this year figures to higher than at any time since 1998, according to the American Bankruptcy Institute. In the first two quarters of 2001 alone, more than 20,000 businesses filed for bankruptcy protection, compared with about 18,700 through the same period last year.
In recent days a number of brand-name companies have filed for bankruptcy. On Monday, BethlehemSteel Corp., which was founded in 1904 and made girders for the Golden Gate Bridge and Empire State Building, filed for Chapter 11. Management at the nation's third-largest steel maker blamed the company's troubles on cheap foreign competition and high labor and retiree-benefit costs. It has since lined up $450 million in financing.
The auditor at another steel maker, Birmingham Steel Corp, said it doubts the company can remain in business in the face of huge debt repayments and a working capital deficiency.
"These conditions raise substantial doubt about the company's ability to continue as a going concern," noted a Birmingham Steel regulatory filing. Ernst & Young is the company's auditor.
Retailers and chain operators are also feeling the economic pinch. On Friday, camera maker Polaroid Corp., filed for Chapter 11 bankruptcy protection. Some observers believe the company will never emerge from bankruptcy, but rather will sell its assets.
And on Thursday, Regal Cinemas Inc., the largest movie- theater chain in the US, filed a petition for Chapter 11 reorganization. Management at the theater chain expects the company to emerge from Chapter 11 within 60 to 90 days, however. During that period, Regal Cinema plans to close about two dozen theaters.
Last month, company management warned it would file for bankruptcy, noting that its reorganization plan had support from the majority of Regal's creditors. Indeed, the plan would result in the transfer of ownership from powerhouses Kohlberg Kravis Roberts & Co. and Hicks, Muse, Tate & Furst Inc. to a consortium led by Philip Anschutz. Anschutz, a wealthy Denver businessman, owns the United Artists and Edwards theater chains.
Home improvement is also going to get tougher in the coming months. Household goods specialist Lechters, which filed for Chapter 11 bankruptcy protection in May, stated it will shut down its stores and liquidate its inventory. Management at the company had been trying to sell the retail chain to an unnamed buyer, but that deal apparently fell through.
S&P Cuts Ratings on Big Two
On Monday Standard & Poor's stunned Detroit and investors when it cut its ratings on General Motors Corp. and Ford Motor Co., citing rising competition amid a deepening auto industry slowdown.
The rating agency knocked down the automakers' long-term ratings by two notches. It also downgraded the short-term debt, which could make it tougher for the automakers to borrow money in the commercial paper market.
S&P cut Ford's and GM's long-term corporate credit senior unsecured debt ratings to BBB-plus (its third-lowest investment grade) from A, and their short- term ratings to A-2 from A-1. The downgrades also affect the Ford Motor Credit Co. and General Motors Acceptance Corp, the companies' captive finance arms.
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