Unprecedented Surge in U.S. Corporate Defaults Expected in 2009 with Continuing High Levels Through 2010

NEW YORK–While consensus economic forecasts call for a GDP turnaround in the U.S. as early as the second half of 2009, a new corporate default outlook released today from the Bain Corporate Renewal Group (Bain CRG) finds that up to 200 companies – that are speculative grade debt issuers (grade B or lower) and possess more than $100 million in assets – will likely default this year. This number of defaults is the equivalent default rate of 11-13% of all speculative grade debt issuers and is historically unprecedented in the U.S., according to Bain CRG’s Spring 2009 Default Outlook. The authors also predict that corporate defaults will lessen only slightly in 2010, reaching 7-9% next year, equivalent to 120-140 total defaults.

“Though some indicators are suggesting an overall improvement in economic conditions, the numbers we’re looking at point to a looming pile up of large company corporate defaults over the next 18-24 months,” said Sam Rovit, author of the study and managing partner of Bain CRG. “While consumer cyclical industries remain the most at risk, we are seeing the default virus spread to industries once thought of as safe.”

Media is one of several consumer cyclical industries that faces escalating default pressures. Speculative grade companies make up approximately 83% of the traditional media industry. Of the $400 billion of media industry debt, nearly $250 billion is speculative grade, which is most at risk. Almost $120 billion is due within five years, while at the same time interest payments as a percentage of pre-tax profits are spiraling upward. The authors see these conditions as a prelude to further media industry defaults on the horizon.

“Many executives and investors alike continue to view the new world through a lens from a time gone by,” added Rovit. “People are scrambling to find safe harbors in this economic crisis, but none exist, either by sector or geography.”

The study also points out that the ‘shape’ of corporate defaults has changed in the current recession. Historically, chapter bankruptcy filings accounted for two-thirds of all speculative grade defaults. That number has fallen by nearly half in 2009. Conversely, ‘distressed exchanges’ (i.e. debt exchanged for more flexible and often longer-term repayment schedules) historically accounted for approximately 10% of all speculative grade defaults. That number has ballooned almost three-fold this year given that bankruptcy is a less attractive option than it was in more credit rich environments. In today’s constrained credit markets, distressed exchanges can increase the probability of debt recovery and corporate survival in situations where bankruptcy could potentially result in liquidations.

“Today, the combination of continued weak consumer demand, leveraged balance sheets and limited credit availability make it imperative for all businesses to be managing cash aggressively,” said Rovit. “Moreover, once we get through this difficult economic environment, we will enter the second act of the credit crisis which is the pig in the python of debt maturities coming due – debt that was raised at a high water mark of leverage ratios we are unlikely to see again for many years.”

Editor’s note: To arrange an interview with Sam Rovit or to receive a copy of the Bain CRG Spring 2009 Default Outlook, please contact Cheryl Krauss at email: cheryl.krauss@bain.com or 646-562-7863 or Frank Pinto at email: frank.pinto@bain.com or 917-309-1065.

About Bain Corporate Renewal Group (Bain CRG)
Bain CRG provides integrated, rapid turnaround services and unites Bain’s heritage of turnaround work, deep industry, operations and strategic expertise, with financial restructuring capabilities. It brings together three market-differentiating capabilities to preserve shareholder equity:

• Financial and restructuring professionals experienced in cash modeling, cash management and creditor negotiations
• Senior partners with both consulting and line management experience who can take on interim CEO, CFO and CRO roles
• Access to the breadth and depth of Bain’s global industry, operational and strategic expertise

Bain CRG is differentiated in its ability to deliver in-depth turnaround expertise and provide interim CEO/CFO/CRO leadership to drive a financial and operational turnaround. For more information visit: http://www.baincrg.com

About Bain & Company, Inc.
Bain & Company, a leading global business consulting firm, serves clients on issues of strategy, operations, technology, organization and mergers and acquisitions. The firm was founded in 1973 on the principle that Bain consultants must measure their success by their clients’ financial results. Bain clients have outperformed the stock market 4 to 1. With 40 offices in 27 countries, Bain has worked with over 4,150 major multinational, private equity and other corporations across every economic sector. For more information visit: www.bain.com.