World's Biggest Companies Are Deep In Debt

Gaming tycoon Sheldon Adelson's recent gyrations resemble those of Cirque du Soleil, an act he often books in his casinos. Prior to the financial crisis, the CEO of Las Vegas Sands Corp. was flying high, aggressively expanding into Asia. Now, with consumer spending plummeting, what looked savvy has become a bad bet. Last month, Adelson and his wife injected $475 million of their own money into the Sands to meet capital requirements stipulated in loans made for casino development in Macao. Over the past year Adelson's personal wealth has shrunk by an estimated $16.6 billion while the Sands' share price has tumbled from a peak near $150 to below $6. Bankruptcy has become a real risk.

Adelson isn't the only high flier at risk of falling to earth. Fueled by reckless credit expansion since 2000, the U.S.-centered financial crisis is shifting from crippled banks, brokerages and hedge funds into the real economy, with corporate troubles mounting. Businesses that cranked up leverage during the years of ultracheap credit are confronting repayment woes—sometimes exacerbated by poor risk management—that could well spell their demise. The list includes titans like Ford and General Motors in America, Deutsche Post and telecom Italia in Europe and Hong Kong-listed Citic Pacific Ltd., which recently declared a $2 billion loss from a dubious currency hedge. The common denominator is debt, which a recent report by Westhall Capital in London calls "the new weapon of mass destruction." It warns: "As the credit crisis spills over into the real economy, a wave of corporate bankruptcies looks increasingly likely."

The pain is spread across every geography and sector. Compiling data from Bloomberg, Westhall calculates that two thirds of the largest listed corporations globally now have negative net cash positions, meaning that their operations currently generate less working capital than is required to run them. When loans were cheap and expansion was priority one, this wasn't foreseen as a problem. Today it represents an existential issue, particularly for companies that must soon refinance a significant portion of their debt. The report, entitled "The Good, the Bad and the Dead?" identifies a list of household names (including automakers GM, Ford, Peugeot, Renault, BMW and Hyundai) facing significant debt-rollover challenges. Just as with banks, doubts about the actual net worth of at-risk companies have intensified to become "primarily a problem of solvency," says Westhall's Keith Woolock. "We worry that this could spread."

One category of concern: companies dependant on discretionary spending. That's because retail, tourism and entertainment receipts are down sharply in the industrial economies, and slowing even in emerging markets. Whether its $4 cappuccinos, the new cell phone or the latest handbag, consumers aren't shelling out for it like they did even a few months ago. American doughnut chain Krispy Kreme, for example, abruptly closed most of its outlets in Hong Kong last week due to weak demand for its treats. Elsewhere in Asia, the giant electronics rivals Samsung and Sony both recently announced sharply lower earnings and reduced their growth forecasts for 2009 on slumping demand for their semi-conductors, MP3 players and flat-panel televisions. Richard Reid, a Citibank equities analyst, thinks this blow is landing hardest on high-end brands and retailers, as Wal-Mart and its ilk benefit from a shift toward bargain hunting. "Households seem to be very quick now to trade down to heavy discounters, move away from eating out, and of course use the Internet to compare prices," he says.

There's also disconcerting evidence that suggests a similar consumption slowdown in emerging markets. Recently havens of hypergrowth, the BRICs (Brazil, Russia, India, and China) have suffered stock-market crashes far deeper than Wall Street's this year, which portend trouble for key global industries. Consider the twin pillars of modernity: automakers and airlines. Both suffer extreme overcapacity and flagging demand globally, which has been exacerbated of late by unexpected sluggishness in Asia. Auto sales in China, now the world's second-largest automobile market behind the U.S., have fallen for two months running and by one credible estimation the industry's combined output is now at a dismal 65 percent of capacity. Things are no better on the tarmac. Last week, Air China and China Eastern (the largest and third-largest state carriers respectively) posted a combined third quarter loss of $605 million due to sagging passenger demand and higher fuel costs.

As the saga of India's Jet Airways illustrates, the sudden turbulence can cause whiplash. Once a flagship of the "India shining" story, it lost $82 million in the second quarter of 2008—leaving it scrambling to secure additional loans, defer the $567 million fuel bill it owes state refiners, and slash costs. As recently as mid-year, Jet was expanding—in 2008 alone, it added 11 major new routes and eight multi-million dollar jets. Now, with its stock price down about 20 percent from 1048.80 to 131.10 rupees, and a debt-to-equity ratio of 1,000 percent, the company is on life support.

Jet Airways' fall underscores the fact that foreign investors pulled an estimated $275 billion out of India's stock market this year. And that outflow—the result of debt-laden foreign banks and hedge funds selling assets in a panic to raise capital—also caused the Indian rupee to depreciate to its weakest level since pushing the cost of fuel and other imports to India higher and adding yet more stress to the airline's bottom line.

Looking forward, strategists disagree on whether this "vicious redemption cycle" (as Morgan Stanley's managing director in India, Ridham Desai, termed it recently) is largely over or could wreak yet more destruction as it plays out. Sean Darby, head of regional strategy at Nomura International in Hong Kong, is bearish. In an Oct. 24 note to clients he warned of "a growing risk that the G7 credit crisis is spreading into an outright emerging-market dual banking and currency crisis." His argument is that capital flight, particularly from countries with current account deficits, will continue to rattle financial systems for some time to come and could undermine currencies from Vietnam to Iceland, putting companies in those places at risk of currency fluctuations, loan rollover issues and even insolvency. He says that the dangers come from rising foreign liabilities and wakening local currencies in emerging Europe.

But the news isn't really good anywhere, as prospects for global growth darken. Singapore, a trade, tourism and financial bellwether in Asia, has already slipped into recession, though its major listed companies are comparatively well capitalized and therefore not at great bankruptcy risk. Still, its economy is in for a rough patch as the construction sector, trade, and finance have all shifted into reverse. Tourist visits peaked at 10.3 million last year but could dip to 8 million in 2009, which is why nervous travel agents, restaurateurs and retailers are watching Adelson's every move with bated breath. His latest Asian venture, a $4 billion integrated casino resort called the MarinaBay Sands, is scheduled for completion in the city in late 2009. But following local media reports last week suggesting it had been delayed due to the Sands' financial woes, the Singapore Tourism Board issued a statement that it would "facilitate the success" of the project, signaling that official financial support could be in the offing. "Economics 101 suggests that the next few years will be particularly difficult," says Richard Martin, managing director of International Market Assessment Asia. "From 2011 onwards Singapore's gamble should pay off, but getting to 2011 will be tough." Indeed, many of the world's largest companies could be walking a tightrope to get there.