Capital Markets

PwC Predicts Steep Drop in Bankruptcies

The accounting firm cites improved growth and better borrowing costs as factors. Similar conditions preceded a previous eight-year decline in Chapt...
Stephen TaubJune 15, 2004

In the latest of a number of upbeat economic signs, PricewaterhouseCoopers is forecasting a sharp decline in the number of public companies that file for bankruptcy in 2004.

The firm predicts about 110 companies will file for bankruptcy, down from 133 last year and 189 in 2002. In 2001 a record 257 companies filed for bankruptcy.

PwC cites “improving conditions in 2003 and the anticipation of continued economic growth in 2004.” The firm points out that similar conditions in 1992 preceded an eight-year decline in total bankruptcy filings, adding that it expects that another long-term decline is already in progress.

In fact, PwC notes, each of the predictive factors that it tracks in its bankruptcy-forecasting model moved in favorable directions during 2003. For example, borrowing costs declined, as indicated by the falling yield on Triple-A corporate bonds. Further, the risk premium demanded by investors on corporate debt relative to U.S. Treasurys shrank.

As a result, companies had improved access to capital, according to the Big Four firm. Last year, too, companies did a good job of paring inventory levels, indicating an improved market for product sellers.

Companies with speculative-grade debt especially benefited from the brightening conditions. The default rate among those companies fell by nearly 50 percent during 2003 alone, according to Standard & Poor’s.

Citing Thomson Financial data, PwC also points out that high-yield debt issuance fell in 2003 to $267.1 billion. That has significance in predicting the number, since high-yield debt is a lagging indicator of public-company bankruptcies, according to the firm. The declines recorded in high-yield debt issuance in 2002 and 2003 are thus favorable for the corporate bankruptcy picture in 2004 and beyond.

Another reason the accounting firm is optimistic about 2004 is that it expects interest rates to remain low, even if the U.S. economy expands by the expected 4.5 percent annual rate. “The risk premium on AAA-rated corporate debt is expected to remain low and may narrow further during 2004,” it adds. Such low risk premiums would likely lessen the burdens on companies within range of financial failure.

The favorable economic conditions should help several industries that experienced a high proportion of the bankruptcies in 2002 and 2003 record fewer in 2004, PwC notes. They include pharmaceuticals, computer software and equipment, and airlines.

In a possibly related item, taxable-bond mutual funds reported net-cash inflows of $47 million last week, with $154 million going to investment-grade, corporate-bond funds, according to AMG Data Services. Junk-bond funds, however, suffered net outflows.