Posted on: Tuesday, September 3, 2002

Debt-watchers see signs of improvement

By Matt Krantz
USA Today

With a flurry of firms such as US Airways, UAL and Dynegy flirting with bankruptcy filings, it may appear the country is going broke. But it's not.

Analysts who study companies' ability to pay their debt say things aren't as bad as they seem. Despite the recent high-profile blowups, fewer firms are defaulting on loans now than at the start of the year. And there's an even better sign: Fewer companies have been slapped with the lowest credit rating, which some say is a leading bankruptcy indicator.

This indicates the surge of bankruptcies may be petering out. "We're at the end of the wave," said Paul Mancuso of Fitch Ratings. He said most of the weak companies that got financing in the 1990s boom have already failed. "The poor credit quality of the late 1990s has worked itself out," he said.

Promising signs include:

• Fewer weakest links. Only 49 companies were given the dreaded "CCC" rating or lower and negative outlook from Standard & Poor's, as of Aug. 9. That's still roughly double the historical norm, said Diane Vazza, managing director at S&P. But Vazza noted that the number of such "weakest link" companies is down from 59 in January.

• Fewer deadbeats. Only 4.35 percent of U.S. companies defaulted during the 12 months ended in July, said Moody's Investors Service. That's down from 4.95 percent of defaults suffered in the same period ended in February. According to Moody's, the default rate has declined since April.

• Falling bankruptcies. A total of 129 publicly traded companies have filed for bankruptcy this year. That's about one bankruptcy every 1.8 days, says BankruptcyData .com. In 2001, a company went bankrupt about every 1.4 days.

• Receptive investors. Even some struggling companies are finding investors. Warren Buffett's Berkshire Hathaway, for instance, joined two other investors on July 8 to buy $500 million in debt from CCC-rated telecom firm Level 3 Communications. Another CCC-rated company, Choice One Communications, on Wednesday raised $49 million from investors including Morgan Stanley and Wachovia.

But some of the debt-watchers' signs could be skewed. When United Airlines' parent UAL warned recently that it might have to file for bankruptcy, S&P still had it rated as a B. S&P cut UAL's debt rating to CCC soon after, adding another "weakest link" to the list.