Business bankruptcies predicted by Moody’s
The credit ratings agency, Moody’s, is anticipating the rate of bankruptcies of companies with significantly more debt than equity to increase considerably over the next year.
Recently, default rates for businesses and bankruptcy have been at all-time lows as companies have had little difficulty making repayments on loans or bonds. However, up to July of this year, when the US sub-prime mortgage crisis caused turmoil on the money markets, companies in difficulties could obtain rescue financing relatively easily and this kept default rates low.
However, the current liquidity crisis in the markets could trickle over into the broader economy, resulting in slower consumer spending and an increase in the amount of businesses placed in administration.
Consequently, Moody’s is predicting that the rate of defaults will double in the next 12 months and those companies with persistent negative cashflow or flawed business models will be in danger.
In addition, Moody’s expects the US default rate to increase to 4.1% by July 2008, as compared with 1.4% at the end of August 2007. The credit agency also predicts that the rate in Europe could reach 3%, as compared with 2.9% currently.