Large Increase in Number of Companies At Risk of Defaulting On Their Debt

The August 19, 2008 issue of The American Bankruptcy Institute Update reviewed comments from credit rating agencies which indicates that the number of companies most at risk of defaulting on their debt has soared this summer due to a decrease in consumer spending and the on-going credit crisis.

• In a recent report, Moody's Investors Service stated that 63 companies had the weakest liquidity rating and were in danger of defaulting on their debt. This is an increase of almost 19% in just one month.
• Recently, Standard & Poors listed 156 companies as most at risk of default...its highest total since May 2003. S&P went on to state that these companies are at risk of defaulting of $352 billion which is three times the last month's total.
• S&P also reported that as of August 11th, 52 companies have defaulted on debt worth $41 billion.

The financial community expects the current credit crisis to continue for some period of time. It is expected that the number of companies which will actually default on debt to increase substantially in the coming months as they struggle with low liquidity. It should be noted that many of these companies are not using one of their best assets, their accounts receivable, as a source of working capital as they face default. Many companies could reduce the risk of defaulting on their debt by selling their accounts receivables.

Healthcare companies can also benefit from a specialized form of A/R funding called MAR Funding. MAR Funding enables healthcare companies to sell their third party claims and receive cash right away instead of waiting 30, 60 or 90 days for reimbursement.

Debt Default Rates On The Rise

The June 26th issue of ABF Journal contained an interesting article in which Turnaround Industry Professionals noted that they expect debt default rates to climb substantially. They predicted that debt default rates will rise above 10% in 2009 as the credit crunch continues to disrupt working capital for many healthcare companies.

In a recent Turnaround Management Association poll, about 70% of the respondents expected a surge of defaults in the next three years, with 2009 being especially large. Further, about 94% of the TMA poll respondents said credit is tighter this year and 80% stated that traditional lenders have become less active and are putting more restrictive covenants and conditions on the loans they do make.

Of course, this tightening on traditional loans is creating a working capital shortage for many healthcare businesses and is causing them to seek alternative sources of working capital. Many have discovered that Medical Accounts Receivable (MAR) Funding can be an excellent source of working capital without restrictive covenants/conditions and without putting incremental debt on the balance sheet.