Companies that defaulted using a distressed exchange during the Great Recession may not have improved their capital structure enough to prevent it from happening again “down the road,” according to Moody’s Investors Service.
Thirty-five percent of initial defaults in 2009 were through a distressed exchange, above the average of 11 percent from 1970 through 2007, Moody’s said in a report. In a distressed exchange, a borrower offers creditors a new or restructured piece of debt that has less value than the original, allowing the company to avoid a bankruptcy filing.
Some companies may re-default if credit conditions weaken because of the debt crisis in Europe or a slow economic recovery in the U.S, even though Moody’s expects the U.S. default rate to remain low next year, according to the report’s authors led by David Keisman, senior vice president.
“Three years after U.S. corporate defaults reached their peak during the great recession, an analysis of the more than 1,000 defaults listed in Moody’s Ultimate Recovery Database suggests some may be poised to re-default,” Keisman wrote in the report.
Moody’s doesn’t expect a surge of re-defaults, according to the report, and the current forecast calls for a low default rate in 2013 because of a healthy high-yield market, solid corporate liquidity and narrowing credit spreads.
Moody’s estimates the U.S. speculative-grade default rate will be 3 percent or less for most of 2013, below the average 4.6 percent since 1992.
“The debt crisis in Europe, slow economic recovery in the U.S. and concerns over China’s growth rate are factors that could weaken the credit environment and make some companies more vulnerable to a re-default,” the authors wrote.
The most common re-default is two Chapter 11 filings, also referred to as Chapter 22. About two-thirds of companies with more than one default, including Twinkies maker Hostess Brands Inc., experienced a Chapter 22, according to the report.
Hostess went through a second Chapter 11 because “it failed to solve all of its problems during its first turn in bankruptcy court,” according to the report. Ten companies in Moody’s database have filed for bankruptcy three different times, including Anchor Glass Container Corp., and two have filed four different times.
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