- So schauts aus..... - XERXES, 07.02.2002, 10:23
- Re: So schauts aus..... - Emerald, 07.02.2002, 12:07
So schauts aus.....
Corporate debt burdens economy
By Tom Petruno
Los Angeles Times
A new wave of corporate bankruptcies is reminding workers and investors the fallout from the recession isn't over.
A major problem remains with the huge debt load U.S. companies took on during the late 1990s.
Corporations, excluding banks and other financial companies, have more than $4.9 trillion in bond and bank debt, up $1 trillion since 1998. Some analysts think high corporate debt could keep any economic recovery in low gear for the next few years.
"Unless you see a rapid turnaround in profit growth, (many companies) are going to be financially strapped" by debt, said Paul Kasriel, an economist at Northern Trust Securities in Chicago. That, in turn, could limit businesses' ability to spend on equipment or new workers.
Even as key economic indicators suggest a rebound, the recent failures of Enron and Kmart, among others, have illustrated the threat companies face from heavy debt burdens.
The boom of the late 1990s encouraged companies to borrow aggressively, particularly via long-term bonds. The total amount of corporate bond debt outstanding rose 25 percent between the end of 1990 and the end of 1994, according to credit-rating firm Moody's Investors Service. But as the economy grew rapidly from 1995 to 1999, corporate bond debt rocketed 125 percent, to $2.59 trillion by the end of 1999, Moody's said.
Perhaps more striking, as the economy slowed in 2000 and 2001, corporate bond debt continued to grow, reaching $3.39 trillion by the end of last year, according to Moody's. Most corporate borrowers continue to pay their lenders the interest they're owed. Still, the interest costs that firms bear have helped cause a plunge in corporate earnings that has been far more severe than the modest decline in U.S. gross domestic product would imply.
For example, paper-and-forest-products giant International Paper borrowed heavily in recent years to acquire major rivals. The deals have nearly doubled the company's long-term debt burden since 1996, to $13.3 billion. The company's interest bill on its debt totaled $929 million last year, which helped reduce its profit for the year to $214 million, a 78 percent drop from 2000.
Of course, debt often serves a useful purpose, analysts note. Bonds allow companies to make investments that may ultimately produce generous returns for shareholders. But debt costs that seemed manageable in a boom can quickly become onerous in a bust.
"Debt only becomes a problem when a company isn't generating enough cash flow to meet" interest and principal payments, said John Lonski, a Moody's economist.
That predicament has befallen many more companies in the past year, resulting in the highest rate of bond defaults — missed interest payments — in a decade.
Moody's said 253 companies worldwide defaulted on $110.2 billion of bonds last year, compared with 167 companies defaulting on $49.2 billion of bonds in 2000.
The firm expects defaults to rise in the first half of this year.
William Dudley, an economist at Goldman Sachs, and others note that the continuing surge in bond issuance last year in part reflected companies' refinancing of older, higher-cost debt at lower yields, just as many households refinanced their mortgages to save money as interest rates dropped.
Copyright © 2002 The Seattle Times Company
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