T-Waves

[sarai]

Corporate debt saps nation
Credit stress hits Depression level
By Jennifer Beauprez
Denver Post Business Writer


Sunday, August 18, 2002 - U.S. corporate debt nearly doubled in the past five years - to $3.9 trillion by the month of May.

U.S. consumers spent that same amount on all services - from haircuts to dog grooming - during 2001.

The burden, already buckling many companies under the load, threatens to send the nation into a prolonged recession.

"We're looking at an economic heart attack in front of us," said John Riley, president of Cornerstone Investment Services, a money management firm in Providence, R.I. "We're faced with owning up to the excesses of the late 1990s."

In 1997, U.S. corporate debt - which includes bonds issued by companies to finance their activities as well as bank loans - was $2 trillion, according to the Bond Market Association.

Moody's Investor Research now says the nation is in the worst credit stress since the Great Depression of the 1930s.

The result, thus far: Forty-two companies defaulted on $46 billion in loans during the second quarter, breaking the record in dollars, according to a July report by Moody's.

The tally was double the volume during the same time last year. For the first half of this year, companies failed to pay $76.6 billion in loans, a 64 percent increase over the first half of 2001.

Moody's expects the defaults will keep rolling in through next summer but predicts the trend has already reached its peak.

Yet as those defaults keep coming, the economy will continue to feel the pain, quashing investor and lender confidence and slowing hiring, expansion and new investment elsewhere.

The fallout could even lead to higher monthly premiums on the average person's life, car or home insurance policy, said Mac Clouse, director of the University of Denver's Reiman School of Finance.

Why? Because life insurance companies, pension funds and investors buy bonds - which historically are safer than stocks - with the intent of earning interest on that debt. Insurance companies put 90 percent of their investments into the bond markets, which will inevitably suffer when companies can't make their payments.

"If there are a lot of claims and fewer dollars to pay the claims, the only way they can make that up is with higher premiums," Clouse said.

The companies that don't default and struggle to pay down their debt may still do harm to the economy with cutbacks. Experts say more layoffs, fewer services and little new hiring will result as companies preserve cash for debt payments.

"It's a bunch of dominoes that could collapse," said Mike Gasior, president of American Financial Service, which trains and consults for institutional investors. "All that money is going to have to be paid back."

But that wasn't the logic back in the heyday of the late 1990s.

Companies borrowed billions to grow as quickly as possible. Cable TV and telecommunications companies were the biggest borrowers in their pursuit of building the world's high-speed Internet and phone connections. Those plans collapsed with the economy.

Telecom companies accounted for 61 percent of loan defaults during the second quarter of this year, according to Moody's. Last year, pundits compared the telecom meltdown to the savings-and-loan crisis that cost U.S. taxpayers $150 billion a decade ago.

"There was a lot of momentum, and you had to keep up," said Clouse of DU. "Your stock price said you were a growth firm. That's what the market was expecting. So, well, you had to grow."

That growth was even more attractive because of low interest rates, tax-deductible interest and the wide availability of money.

Just as investors chased dot-coms, they also jumped at the chance to lend to growth companies, Gasior said.

"You could bring any debt deal to the market, and there was money to back it up," Gasior said. "It was the same hubris of the Internet stocks."

The 29 most indebted U.S. companies, not counting financial companies, piled on $446 billion in debt over the past five years, Denver Post research shows.

http://www.denverpost.com/cda/article/print/0,1674,36%257E33%257E801767,00.html