Summit News

Unprecedented U.S. corp. defaults seen for '09

NEW YORK (Reuters) - U.S. corporate debt default rates are expected to hit “unprecedented” levels in 2009, even though the economy may be past the halfway mark of the U.S. recession, according to a forecast unveiled on Monday at the Reuters Restructuring Summit.

Phil Kleweno, a partner in Bain Corporate Renewal Group (CRG), speaks at the Reuters Travel and Leisure Summit in New York March 2, 2009. REUTERS/Brendan McDermid

“There is a lot of pain left -- we are only just half way through the 600 or so defaults in this cycle,” said Phil Kleweno, a partner at Bain’s corporate renewal group.

The forecast for the 2009 corporate default rate has risen to 12 percent to 14 percent, from a May forecast of 11 percent to 13 percent, according to Bain’s corporate default outlook. That suggests a total of about 180 to 210 companies could default on their debt this year.

“Our ongoing gross domestic product models are calling for a softer and longer climb out” of the economic decline than previously thought, said Kleweno.

Defaults will rise to 500 to 600 in the period between 2008 and 2011, up fivefold from the previous four-year period.

About 50 percent of defaults to-date have occurred in media, entertainment, automotive, chemicals and packaging industries. Going forward, there will be little relief for these sectors, he said.

“Consumer facing companies will continue to be at a higher risk of default,” said Kleweno.


More defaults will come from debt exchanges -- meaning a company agreed with its bondholders to exchange old debt for new debt and equity -- rather than from corporate bankruptcies, according to the study.

Distressed debt exchanges have occurred 40 percent more often than bankruptcies so far this year.

“People are being proactive,” said Kleweno. But he added that these amendments are only buying time. Rather than fixing the balance sheet, the amendments and lender negotiations tend to kick the can down the road and defer the problem, he said.

Though Bain expects the U.S. economy to bottom by the end of this year, corporate default pressures will remain as many companies continue to struggle to meet interest payments on heavy debt loads.

Bain expects the default rate in 2010 to be around 9 to 11 percent of debt issuing companies, or about 140 to 160 defaults.


A spike of maturities beginning next year will cause the next wave of financial distress, according to the Bain study.

Debt maturities are expected to rise 50 percent in 2010, from the year before, to $62 billion, then almost double again the following year, to $117 billion.

“As debt matures over the next couple of years, speculative grade refinancing will prove difficult,” according to the Bain study.

Reporting by Emily Chasan and Chelsea Emery; Editing by Tim Dobbyn