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Debt-Ceiling Distress

What companies are telling the SEC about the consequences of not raising the federal debt limit.
Alix Stuart, CFO.com | US
July 29, 2011

The federal debt-ceiling drama could affect companies in a number of ways, if Congress doesn't raise the government's credit limit soon. And while most CFOs are watching and waiting, a handful of public companies have been spelling out those ways in their recent filings with the Securities and Exchange Commission.

Government contractors that rely on the federal budget for a paycheck are among the most obvious to speak up about the issue. Northrop Grumman, for example, noted in its 10-Q on Wednesday that many of its federal contracts call for the company to continue working even if the government is unable to pay on time. While the $35 billion defense contractor says it does not expect the United States to default, at least not for very long, it offers this disclaimer: "It is unclear how long the U.S. Government's bill paying capacity might be constrained, and therefore, how long the company might be required to finance contract activities; however, it is likely that there are practical limitations on how long the company could finance its operations under these circumstances. . . . [A]n extended delay in the timely payment of billings by the U.S. Government would likely result in a material adverse effect on our financial position, results of operation and cash flows."

The effects of a cash-strapped government could also extend into the health-care sector. Centene, a $4.3 billion company that sells health insurance plans, disclosed in the 10-Q it filed on Tuesday that "the failure of the federal government to raise the federal debt ceiling could affect funding for Medicaid and our cash flow." Other companies, particularly in the pharmaceutical and medical-device arena, need approval from the government to move their businesses forward. Hansen Medical, which makes medical robotic devices, noted as far back as May that the debt-ceiling dilemma might result in a government shutdown that "may cause significant delays in the FDA's ability to timely review and process" its April application for permission to sell a major new product in the United States.

Then there's the concern about the effect a default could have on the corporate portfolio. In its 10-Q last week, Acme Packet cautioned that Moody's placing the United States on review for a possible downgrade could affect the "liquidity or valuation of our current portfolio of cash, cash equivalents, and investments, a substantial portion of which were invested in U.S. treasury securities as of June 30, 2011." (The company held close to $200 million in U.S. agency notes, mainly short term, the 10-Q noted, compared with $120 million in cash and cash equivalents. It held no other types of investments.)

Other companies just seem to be taking a generally cautious route. Ebay, for example, lumped the debt-ceiling deadline in with a host of other macroeconomic factors in its 10-Q filing last Friday, including the sovereign debt crisis and tenuous consumer demand. Hubbell, which makes electrical products for the construction, industrial, and utility markets, gave a nod to the risks related to the cost and availability of credit that a government default could create. The company "continues to monitor the potential downgrading of the U.S. government's credit rating, including the uncertainty surrounding the U.S. government's ability to raise the federal debt ceiling," the 10-Q filed last week said, noting rather unhelpfully that "management cannot predict with any certainty the impact to the company should any future disruptions occur in the credit environment as a result of these issues."

CFOs would be wise to make sure their concern about the debt ceiling is well founded before putting anything in writing. "The SEC tends to frown on companies that include generalized concerns or risk factors," says Charles Vaughn, a partner in the Atlanta office of law firm Nelson Mullins Riley & Scarborough.

Assuming Congress raises the debt ceiling sometime soon, many finance executives won't have deal with the issue, of course. Until then, however, "you're going to have to look at the situation essentially up to the date of your filing and take your best guess" about whether and how a failure to raise the ceiling might affect your business, says Vaughn.

 




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