Storm clouds gather over highly indebted companies, Moody's says

Party City Holdco

19/04/2023 13:45

By Matt Tracy
       WASHINGTON, April 19 (Reuters) - Credit ratings agency
Moody's Investors Service Inc said on Wednesday it has pushed
more highly indebted companies to the bottom of its junk ratings
barrel and that debt defaults are also on the rise as financing
conditions tighten.
    The number of companies rated B3 negative or lower by
Moody's rose to 227 in the first quarter of 2023, a 4% increase
from the fourth quarter of 2022 and a full third more than the
first quarter of 2022, according to two reports from the agency.
    That is the highest quarterly figure since August 2021 but
still below a pandemic-era peak. The list includes movie theater
chain AMC Entertainment Holdings  AMC.N , textbook publisher
Houghton Mifflin Harcourt and drugstore chain Rite Aid  RAD.N .
    Moody's cited elevated debt, weak profitability and price
pressure among the reasons for the downgrades. 
    "We expect the (list) to continue to grow in size, given
difficult credit conditions and market volatility...," analysts
wrote in one of the two reports.
    Much of Moody's rating actions are driven by the Federal
Reserve hiking interest rates to combat inflation. This raises
the financing costs for companies, especially those that use a
lot of debt such as the ones owned by private equity firms. 
    Private equity-owned companies make up nearly three-quarters
of Moody's list. 
    "The rise in interest rates materially increased the
debt-service costs on some of these companies' floating-rate
debt, resulting in weaker interest coverage," the Moody's
analysts wrote.
    In addition to higher interest payments, Moody's noted, many
of the downgraded companies have fewer funding paths to staying
afloat. This is because many lenders have retrenched after last
month's banking crisis. 
    Over the next year, Moody's expects corporate defaults to
more than double to 5.6% from 2.7% currently. 
    Sixteen of the 30 companies that fell off Moody's at-risk
list last quarter did so through defaults, not improved
financial outlooks.
    More than half of last quarter's 16 defaulted companies
avoided bankruptcy through distressed exchanges, using loose
covenants in credit agreements to restructure debt.
    As defaults rise, distressed debt exchanges will be the
route of choice for many companies and their private equity
owners, Moody's noted.
    "Over the next 12 months, the number of distressed exchanges
(DE) will continue to climb, given that an overwhelming majority
of the lower-rated spec-grade debt issuers are private-equity
(PE) owned companies," the analysts wrote.
    Of the other companies that fell off Moody's list last
quarter, seven opted instead to file for bankruptcy. These
include regional sports channel operator Diamond Sports Group
and retail chain Party City  PRTYQ.PK .

 (Reporting by Matt Tracy in Washington; Editing by Chizu
Nomiyama)
 ((Matt.Tracy@thomsonreuters.com;))