After a year when the threat of bankruptcy seemed to lurk around every corner, investors can breathe more easily. Recent data suggest companies are finding their debt troubles easier to manage.
That's a relief to investors whose portfolios were slammed by corporate defaults. In 2009, U.S. companies defaulted on 10.9% of speculative-grade debt, according to Standard & Poor's. Globally, companies defaulted on a record $627.7 billion in debt.
"It's the business equivalent of a 50-year flood," bankruptcy attorney Nicholas M. Miller, a partner in Neal, Gerber & Eisenberg, says of 2009. "Now there are indications the situation is improving a bit."
The nature of the bankruptcy threat is changing, many experts say. Instead of the flood of filings that occurred during the Great Recession, we can expect a steady, strong stream of bankruptcies stretching years into the future.
Corporate defaults seem to have peaked in November and have "inched down slightly" since, says Diane Vazza, managing director of global fixed income research at S&P. This year, S&P predicts the speculative-grade default rate will fall to 5%, less than half last year's rate.
In the first two months of 2010, five U.S. companies filed for bankruptcy, compared with 19 in the same period in 2009, according to BankruptcyData.com.
The credit rating agencies, which monitor companies' abilities to pay back their debts, are sounding more optimistic about the future. Moody's Investors Service (MCO) says it has downgraded the credit ratings of four speculative-grade companies so far this year, compared with an average of 21 downgrades per month in late 2008 and early 2009.
Still, some companies continue to struggle with high debt loads or slow sales. On Mar. 17, Blockbuster (BBI) acknowledged the threat of bankruptcy in a filing with the U.S. Securities & Exchange Commission. The video rental company, whose sales fell 19% last year, to $4.1 billion, has about $963.6 million in debt outstanding.
Many companies used revived credit markets in the past year to refinance debt. That gives them time to revamp their businesses or wait for an economic recovery, but it doesn't necessarily solve the problem of taking on too much debt in the first place.
"There was so much debt raised in the 2003 through 2007 period that it's going to take a while to work through it all," says George Putnam, the editor of The Turnaround Letter and publisher of BankruptcyData.com.
Heavily indebted companies "have put off the day of reckoning," Putnam adds, but they "haven't necessarily solved their problems."
Other companies face the risk of bankruptcy because their industries have changed and their business models no longer work, says Greg Segall, a partner in Versa Capital Management, a private equity firm specializing in distressed investing. These are "companies that are likely to have trouble regardless of the [economic] environment," he says.
One example is health-care companies that could be hurt by federal reform efforts, he says. Media companies have been hurt both by the weak economy and shifting trends in advertising.
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