About 200 US junk-rated companies are likely to default this year, according to Standard & Poor’s, affecting almost $350bn worth of debt and adding impetus to alternatives to bankruptcy, such as distressed debt exchanges.
About half of the 17 US defaults seen in December were a result of distressed exchanges, where a company offers lenders new securities of a lesser value than the debt they are owed, usually to cut interest costs or delay principal repayment.
Debt exchanges are becoming an increasingly common way to restructure debt outside of bankruptcy in the US – they remain rare in Europe – as US companies struggle to refinance $500bn worth of bonds and more than $1,000bn worth of bank loans amid the credit crunch.
S&P said that there was a higher proportion of rated companies in the single-B category than ever before, with 800 business that make up one-third of all corporate ratings. “We expect nearly 200 speculative-grade companies to encounter some form of financial distress, leading to default in 2009,” S&P said. “Currently, we have more than 180 companies rated B-minus or below with negative outlooks. That is where we expect many of the defaults will occur.”
The agency added that the 185 companies most at risk had about $341bn of debt outstanding. Outside the US, 61 junk-rated companies with another $56bn worth of debt are also seen as highly likely to default.
The sectors most at risk are retailers and restaurants, cars and car suppliers, gaming and lodging, media and entertainment, and newspaper and printing. Among the biggest companies at risk are Harrah’s Entertainment, Ford Motor and Claire’s Stores in the US and NXP and Ineos in Europe.
The burgeoning interest in debt exchanges has not come entirely smoothly. Bondholders initially fought against such moves by GMAC, the financing arm of General Motors, and Realogy, a property brokerage, for example.
However, S&P believes investors are likely to become increasingly receptive to exchange offers to improve the recoveries they are likely to make. A dearth of so-called debtor-in-possession financing, which helps companies manage their way through a bankruptcy or reorganisation, has increased the risk of highly costly liquidations.