Credit crisis puts vise grip on leveraged companies
It’s not just homeowners who are having trouble paying bills.
There are 93 US companies at risk of defaulting on $53 billion in debts, a new report shows, marking a 50 percent jump since last June, when the credit crisis started. Many of these debt-laden companies were involved in giant leveraged buyouts.
Standard & Poor’s ‘‘weakest links’’ report is forecasting that 75 US companies will default on their debts in the next 12 months. Of the 93 companies at risk, more than half were involved in takeovers by big-name private equity firms, including Boston’s Thomas H. Lee Partners, Bain Capital, and J.W. Childs Associates.
The sectors worst hit are media and entertainment, and consumer and retail. Many of the names are familiar to consumers, like Uno Restaurant Holdings Corp., the Boston-based pizza restaurant group; Linens ‘n Things Inc., the home goods chain; and Univision Communications Inc., the Spanish-language television and radio company.
‘‘This is just the beginning,’’ said Diane Vazza, managing director and head of Global Fixed Income Research at Standard and Poor’s in New York. For companies struggling with debt payments, she said, ‘‘There’s no way in a slowing economy, potentially a recessionary economy, to grow out of that.’’
Frank W. Guidara, chief executive of Uno Restaurant Holdings, said the company’s positive results have never been fairly reflected by S&P. He said in an interview, ‘‘We have plenty of liquidity,’’ noting that the rating ‘‘means nothing to us.’’
Many companies, however, are in worse shape because they entered into deals with buyout firms at the frothiest point in the market.
They took on large amounts of debt, on the assumption that, if their business grew, they could easily handle the debt service. Then came the subprime mortgage crisis, the meltdown on Wall Street, and the pullback by lenders.
Bain Capital acquired Guitar Center Holdings Inc. last June for $2.1 billion, putting $650 million in debt on the guitar-store chain’s books, according to Dow Jones & Co.’s LBO Wire, an online report. That debt is rated a B-, giving it junk bond status, according to S&P.
Thomas H. Lee’s stake in Spectrum Brands Inc. — a conglomerate that owns Rayovac batteries, an insecticide company, and other products — is troubled, as the company struggles with more than $2.6 billion in debt, rated CCC+.
When a company’s debt rating falls to B- or lower, it is generally seen as riskier and is therefore more costly for the company in this environment, because investors demand a higher payout for riskier debt. Historically, 28 percent of companies with a B- rating default within three years, according to S&P; those with a rating of CCC+ or lower default in 43 percent of the cases.
Bain declined to comment on Guitar Center, but a person familiar with the terms of the deal said the loans were made at time when banks were placing minimal financial requirements on companies — which could make defaults less likely. Lee declined to comment.
How much does it matter when big companies can’t pay their debt? For one thing, it makes the market worse for everybody else, because investors look for safer havens in companies with better ratings.
In addition, the companies’ employees, customers, and suppliers are likely to suffer. The companies might have to slash costs, fire workers, or, in worst-case scenarios, file for bankruptcy protection.
Economist Allen Sinai of Decision Economics Inc. said the likely failure of some large companies would be even more disturbing than last week’s collapse of Bear Stearns Cos.
‘‘We are going through the beginning of the failure fallout, including financial and nonfinancial companies that were heavily leveraged,’’ Sinai said.
Of 11 companies that have defaulted on their debt so far this year, six were private-equity backed, according to S&P.
Beth Healy can be reached at bhealy@globe.com.
