Corporate defaults soar — with worse to come | The Honolulu Advertiser

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Corporate defaults soar — with worse to come | The Honolulu Advertiser | Hawaii's Newspaper

Posted on: Saturday, May 10, 2008

Corporate defaults soar — with worse to come

By Matt Krantz
USA Today

Companies counting on consumers spending like there's no tomorrow are finding tomorrow may not be as bright as they'd hoped.

Corporate defaults, including this week the owner of the Tropicana casinos, are reaching levels not seen in years as companies struggle with a fickle bond market and nervous consumers.

Already this year, 27 U.S. companies have defaulted on their debt, according to Standard & Poor's, exceeding the 16 companies that defaulted in all of 2007. Many of these companies, including Tropicana Entertainment, have already filed for bankruptcy protection.

Bankruptcy experts say the uptick in defaults is just beginning, because massive amounts of debt will come due at a much faster pace in about a year.

"The flood hasn't come yet, but the leading wave of the flood is in sight," says Martin Zohn, head of the bankruptcy practice at law firm Proskauer Rose.

A rise in defaults puts even more pressure on an already weak economy by making lenders skittish and threatening jobs as companies are forced to scale back. Struggling companies are getting pushed over the edge by:

Serious lack of money to borrow. Companies that don't have stellar credit ratings are struggling to raise money, says Mariarosa Verde, managing director at Fitch Ratings. Average B-rated companies, if able to borrow at all, are paying 11 percent interest, she says, up from 8.25 percent a year ago.

Debts coming due. Just as consumers with adjustable-rate mortgages suffered as their interest rates reset, so are companies as their debt matures, says Diane Vazza of S&P. More than $22 billion of debt issued by companies with lower credit ratings comes due the next three quarters, meaning they'll have to borrow amid a hostile debt market. Next year, companies with lower credit ratings see $40 billion in debt come due, Vazza says, and the amount will be double that each year through 2014.

Strapped consumers. A poisonous blend of high gas prices and low confidence is forcing retailers and consumer companies already on the brink into default, Zohn says.

Poor lending standards haunting lenders. Banks and investors were so willing to lend until early 2007, they did it with no strings attached.

Now, lenders can only watch as teetering companies that are likely to default keep burning through cash.

"There used to be stops in the system," Zohn says.

That's why defaults are expected to get worse.

More than 1.4 percent of junk bond issuers defaulted in March, S&P says. By March 2009, that rate will rise to 4.7 percent, above the 4.4 percent average, Vazza says.

"There's going to be a strong demand for bankruptcy services," says Penn Nicholson, partner at law firm Powell Goldstein.

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