Moody’s predicts business bankruptcies

by Gill Montia

Story link: Moody’s predicts business bankruptcies

Moody’s, the credit ratings agency, expects the rate of bankruptcies of highly leveraged companies (that is to say companies with significantly more debt than equity) to increase substantially over the coming 12 months.

In recent times, bankruptcy and default rates for businesses have been at record lows because companies have had little difficulty making repayments on loans or bonds.

Until July of this year, when the US sub-prime mortgage crisis caused chaos on the money markets, companies in difficulties could obtain rescue financing relatively easily and this kept default rates low.

However, the current liquidity crisis in the markets could spill over into the wider economy, causing consumer spending to slow and an inevitable rise in the number of companies placed in administration.

For this reason, Moody’s is predicting that the rate of defaults will more than double in the coming year and that companies with persistent negative cashflow or flawed business models will be at high risk.

The credit rating agency expects the US default rate to rise to 4.1% by July 2008, as compared with 1.4% at the end of August 2007.

In Europe, Moody’s predicts that rate could reach 3%, as compared with 2.9% at the present time.