Low Liquidity Plagues More Firms

Low Liquidity Plagues More Firms

By JEFFREY MCCRACKEN
April 17, 2008; Page C2

More companies than ever are in the weakest of liquidity positions and struggling to cover their bills, according to a Moody's Investors Service Inc. report on public debt.
There are now 47 companies with public debt that Moody's rates as having the weakest of liquidity levels, a number that has more than doubled since June. These 47 companies have combined rated debt of $34.7 billion. Moody's measures a company's liquidity based on its ability to cover its day-to-day cash needs through internal sources like cash flow or external sources like lines of credit.
Moody's downgraded 10 companies to its lowest liquidity rating through the end of March, among them amusement-park chain Six Flags Inc. and home-furnishings retailer Linens 'n Things Inc., which is delaying a bond payment as it tries to stave off bankruptcy. Other companies dropped into this lowest rating category last month include paper and pulp maker Abitibi Consolidated Inc., which has been hurt by declining newsprint demand, and Xerium Technologies Inc., which makes paper-production products.
Historically, about 20% of the companies with the lowest liquidity rating will default on their debts. So far this year, Buffets Inc. restaurant chain and Leiner Health Products Inc. are among the larger companies to default. Five companies with debt rated by Moody's defaulted in the first three months, the same amount that defaulted in all of 2007.
Another recent default is Vicorp Restaurants Inc., the Denver-based parent of Bakers Square and Village Inn that filed for Chapter 11 bankruptcy protection in early April. Overall, Moody's rates seven restaurant chains as having the weakest of liquidity levels.
"I think this shows things aren't getting better and the credit environment is continuing to take its toll," said John Puchalla, Moody's vice president and senior analyst.
He said when these credit agreements are first negotiated, it is expected "over time the companies will get de-leveraged. And that's not happening. If you layer on top of that the weakness in the economy and it increases the vulnerability for many of these companies," he said.
Liquidity-level ratings are based on four components, including the ability of cash balance and cash flow to cover cash needs, room under bank covenants, external sources of capital such as revolvers and alternative liquidity options like assets that could be sold quickly.