<font size=-3>10/10/2001 - Updated 02:19 AM ET</font>
Debt weighs more as firms gobble cash

By Matt Krantz, USA TODAY

U.S. corporations are quickly burning through cash, pushing some toward bankruptcy and making it more expensive for others to borrow money.

Nervous lenders have already cut back sharply on lending to upstart companies and those with heavy debt loads. But cash worries are spreading to well-known companies as earnings fall so fast there is less left to pay debt.

Companies that lost
top borrowing ratings
Companies that lost their top rating for short-term borrowing this year. Falling from the top ranking means these companies lose access to 90% of the providers of short-term loans. With fewer buyers of debt, the companies face higher borrowing costs.

Company Date of downgrade
Edison International Jan. 5
PG&E Jan. 5
Southern California Edison Jan. 5
Albertson's Jan. 8
California Power Exchange Jan. 8
American Greetings Jan. 11
Kellogg Jan. 19
American Home Products Jan. 25
Farmers First Bank Feb. 8
Nordstrom Feb. 8
DaimlerChrysler Feb. 26
International Telecom Satellite March 21
Allegheny Energy March 27
Teco Energy March 27
Gap April 18
Empire District Electric May 7
Motorola May 29
Ipalco Enterprises June 22
Rockwell International June 28
Campbell Soup Aug. 3
Walt Disney Sept. 27
Source: Moody's Investors Service


"If the economy does not turn around soon, these companies are going to sink in their own debt," says Mitch Zacks, director of research at Zacks Investment Research. Among the signs of trouble:

• Even blue-chip firms are struggling with cash. Ford Motor, facing soaring manufacturing costs and a massive liability for its tire recall, has seen cash drop so much — from $18 billion at the end of last year to an estimated $11 billion by year's end — that some analysts say it should slash its dividend.

• Twenty-one firms that once had the highest rating on their short-term debt have been downgraded this year, says Daniel Gates, senior vice president at debt-rating agency Moody's. Both Disney and Campbell Soup have joined the downgraded list. That raises the cost of borrowing.

• Plummeting cash flow had started making debt payments more onerous even before the Sept. 11 attacks. During the second quarter, companies in the Standard & Poor's 500 index saw the amount of cash flow they had available to pay debt fall 35% relative to their interest expense vs. the year-earlier quarter, according to an analysis by Zacks for USA TODAY. Staples and Enron are among those with the biggest drops.

• Cash may be even tighter at airlines than thought. The industry relies on cash it receives upfront from travelers to finance operations. But with travelers asking for refunds, some airlines' cash balances are squeezed."This is a huge cash call," says Michael Mulvaney, managing director at Moody's.

Going into the third quarter, the nine major U.S. airlines had collected $12.3 billion from travelers who hadn't yet flown, a USA TODAY analysis found. That's 30% more cash than airlines had in the bank.

• Upstarts or companies deeply in debt face a credit crunch. Lenders are demanding rates nearly 10 percentage points higher than on government bonds, the most since 1990, says James Didden of J. & W. Seligman. Higher borrowing costs add to the pressure. This year, 120 borrowers have defaulted on $74 billion of bonds, says Diane Vazza, head of global fixed income for S&P. Last year, 108 borrowers defaulted on $34 billion.

Some say the Federal Reserve's nine cuts in short-term interest rates this year will prevent a meltdown."We have not seen a liquidity crisis," says Glen Grabelsky, director of credit rating firm Fitch.




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