Corporate defaults on the rise
TEXT OF INTERVIEW
KAI RYSSDAL: There’s a report out from Standard & Poor’s today that bears some notice. Not so much for what it says — that companies are having a hard time paying their debts, although they are, and in record numbers this year.
S&P says 14 percent of American companies are going to default on their loans in 2009. The more interesting thing really is what those defaults are going to mean for the rest of the economy. Standard & Poor’s Diane Vazza did the research. Welcome to the program.
DIANE VAZZA: Thank you very much. It’s nice to be here.
RYSSDAL: Let’s make sure we understand what exactly this report’s about. Corporate default is another way of saying these companies aren’t paying their debts.
VAZZA: That’s right. They’re not paying their debts.
RYSSDAL: Why is that? I mean, empirically, we sort of know the economy is bad but why is it specifically happening at such a great rate?
VAZZA: Well it’s happening at such a great rate because we’ve had a sharp contraction in the U.S. economy. And when that happens, companies . . . their sales drop off and their profits get squeezed and they can’t pay the interest to service their debts.
RYSSDAL: How bad is it? I mean, can you quantify if for us?
VAZZA: Sure. Last year in the U.S. we had just over 90 companies that defaulted. This year our expectation is that there will be over 200 that could potentially default in the U.S.
RYSSDAL: So what happens to these companies that are defaulting on their corporate debt now if the economy stays lousy for another six months or a year?
VAZZA: Well, some of these companies may be able to restructure their debt. They might be able to go to the holders of their debt and negotiate more favorable terms that will get them through this period. And some companies, in the case of like a Circuit City or Linens ‘N Things, may just go completely out of business and completely liquidate.
RYSSDAL: Is there a vicious cycle here in that these companies who can’t pay their debt eventually go bankrupt or stop buying new products. Then the suppliers of those products have problems, and the people who make the raw materials for those products have problems and it gets ever worse?
VAZZA: That’s right. It affects the entire supply chain. And we saw that very clearly with the automotives. We saw that fan out to all the automotive suppliers. You know, it’s like an onion. And the layers of the onion are . . . you get larger and larger as it affects the entire supply chain.
RYSSDAL: All right, then play this out for me. Because, if that onion keeps on getting peeled, what does it say about the eventual pace of a recovery?
VAZZA: Oh, recovery is clearly going to be slow. So, although our current forecast is to look at the economy bottoming mid-year, it’s not going to feel particularly good in the second half of the year, either. There’s not an immediate bounce back. You know, this will be the longest recession we’ve had in post-war history. We’re expecting it’s going to be 18 months.
RYSSDAL: Is there a way to break the vicious cycle of the debt I talked about earlier? That is, companies not paying their debt and getting into more trouble and not being able to pay other debts and so getting into more trouble?
VAZZA: Well, really, the only way to break the circle that you’re describing is for the economy to stabilize. And that would be housing and that would be a return of confidence in the financial sector. And until that happens, you know, that circle may slow. But we, at this point, we’re in the epicenter of that circle.
RYSSDAL: Diane Vazza, the head of the global fixed income research at Standard & Poor’s, out today with a report on corporations not being able to pay their debts in record numbers in the coming year. Diane, thanks a lot.
VAZZA: Thank you very much.
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