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Just when the markets in the US thought that the Enron chapter was about to close, several new bankruptcy cases are piling up in the world's largest capital market.
What is common between Kmart, Global Crossing, WorldCom, and Qwest Communications? They all have been done in by colossus debt on their books. And barring the last, all have become bankrupt! Their premature demise which shocked the entire US debt market, and whose ripple effect was felt on other debt markets across the globe, is giving rise to the fear that many more debt-ridden companies could also follow the suit. Increasing cases of bankruptcies and debt defaults has led to credit rating agencies actively downgrading several companies' creditworthiness.
According to the credit rating agency, Moody's, credit losses from defaults hit record levels in 2001 with average recovery rate of defaulted bonds falling to 21 cents per dollar, for the third consecutive year. In its latest report titled Bond Default Study 2001, the rating agency says that the global speculative-grade bond default rate in 2001 almost doubled compared to the previous year, reaching a 10-year high of 10.2. The revelations about the statistics are quite startling: 212 rated issuers defaulted on a total of $135 bn of debt in 2001. Further, the dollar volume of the 10 largest defaults in 2001 totaled $46.5 bn, a 39 percent increase from 2000. And, if you thought Enron with a debt of ($9.9 bn) was the only significant defaulter who received all the honors (or brickbats), think again. It's a long list out there and includes some big names like Finova Capital Corporation ($6.3 bn), Pacific Gas & Electric ($5 bn), XO Communications ($4.9 bn), and Southern California Edison Co. ($3.6 bn). Industry-wise, the two largest defaulting industry categories in 2001 by dollar volume were the energy and telecommunications sectors.
Rising cases of corporate defaults have injected tremendous amount of volatility in the US debt markets. And its repercussions are now being felt across the other parts of the globe, especially Europe. Some big names from Europe like DaimlerChrysler, Deutsche Telekom and Repsol have recently seen investors dumping their bonds. Widespread defaults are leading to increase in the yields. The bonds issued by Ford, which is among the most heavily leveraged automakers, yield more than half a percentage point over gilts. A more significant event was the crash in bond prices of the forestry company, Georgia Pacific, again a debt-ridden company, which went bankrupt recently. However, it is not just the bond prices, which are crashing down; share prices of these bankrupt or financially distressed companies have also received severe drubbings on the bourses. News regarding the questionable accounting practices of Qwest Communications has seen the stock lose more than three-fourths of its value in the past one year. Another stock, which has met with similar fate, is the now bankrupt Global Crossing. The company's share price has lost close to 96 percent in the last year.
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