An increase in corporate borrowing costs and Eastman Kodak’s recent bankruptcy filing have set off a round of speculation about whether it is the start of a growing trend in corporate bankruptcy filings. While Chapter 11 bankruptcy filings have been falling since 2009, George Putnam of BankruptcyData.com is expecting an uptick in corporate bankruptcy filings. (“Are corporate defaults set to rise?” USA Today) “We’re going to see more big bankruptcies this year,” Putnam was quoted as saying, adding: “We’ll see a reasonable number even if the economy is pretty strong.”
Investors are also worried about a possible increase in the number of corporate bankruptcies this year, according to the article. The USA Today article made the case for more corporate bankruptcies:
- There have already been five defaults on debt payments in the U.S. and six globally so far this year, according to Standard & Poors. At that pace, we would see 60 defaults in the U.S. by the end of the year. That compares with 39 in 2011 and 58 in 2010.
- Though the default rate for 2011 was only 1.7% of companies with the lowest credit ratings, it is expected to double this year because those companies have “pushed out payment schedules” and “[t]here’s almost nowhere (for default rates) to go but up,” according to Bonnie Baha of DoubleLine Capital.
- Interest rates are rising. The rate for the least creditworthy companies is 6.9 percent higher than Treasuries with similar maturities, which represents an increase of 28 percent from the rates they were paying in June, according to Bank of America Merrill Lynch. Even if investors continue to purchase such bonds and bond funds (implying that investors could see the light and bail swiftly as bond prices drop when interest rates rise), higher interest payments and lower revenues from the slow economy could push up default rates.
Given this increased uncertainty, financial advisers should carefully monitor and disclose the financial condition of companies whose securities they are recommending.
Page Perry is an Atlanta-based law firm with over 170 years collective experience protecting investor rights and fighting Wall Street greed.