The recent financial crisis was one of the worst periods in the economic history of the US. It saw the fall of major corporate lenders such as Circuit City Stores Inc., General Motors Corp. and CIT Group Inc. to fewer organizations.

Currently, the corporate failures are slowing down, thanks to refinancing of balance sheets of companies with fresh debt, pushing out maturities on existing loans or usage of distressed-debt exchanges, to avoid a bankruptcy filing.

As per data provider Dealogic, speculative grade companies (also known as junk grade) have already issued over $123 billion in new bonds this year as compared to $48 billion in the whole of last year. According to Barclay’s capital analysts, at this pace, this year’s amount may challenge the record issuance of $143 billion in 2006.

The current trend of refinancing is troubling some analysts who believe that it is not healing the real problems and is just providing a superficial relief. As per FTI Consulting (a business advisory firm), weaker companies will contribute $1.4 trillion in loans and bonds in the next five years. When the crisis was at its peak in January, Moody’s Investors Service had estimated that about 16.4% of speculative grade companies would have defaulted in the last one year. It has been approximated by some analysts that the default rate will reach its height only after early 2010.

As per Moody’s, the US default rate will hit its upper limit at 13.6% this month and dip down to 4.4% in a year from now. According to Lynn LoPucki, a law professor at University of California who tracks filings by publicly listed companies with assets over $261 million, only three large publicly traded companies had registered for bankruptcy court protection in the month of September, whereas six companies filed for it in October which is again lesser than 16 companies in March.

Normally, high debt issuance means economic vitality because the money is used by companies to expand; however, today, new debt has come to mean almost 100% refinancing. Barclays Capital restructuring Chief Mark Shapiro believes that, despite the recent pause in corporate failures, the number of bankruptcies could see a spike in the coming weeks. In fact, recent times have seen some high profile companies such as Capmark Financial and CIT file for bankruptcy. He also added that the timeframe in which weaker companies can borrow funds will be very limited and the access to high yield markets by small companies is helping stave off many bankruptcies that would have otherwise occurred in the following year.

Hard pressed companies that were kept out of credit markets during winter due to investors’ demand of more than 20% yield on junk bonds, ultimately now the average bond yields are only about 10% (as per Merryl Lynch U.S High Yield Master II Index).

Federal Reserve has opened up the credit market by keeping the interest rates close to zero. If the Federal interest rate policy changes, the debt ridden companies will find it very difficult to refinance billions of dollars in debt coming up as due for payment.

Many companies that needed debt were helped by the government, which offered extremely low yields on safe securities such as Treasury. Thus, people were forced to purchase riskier securities such as junk bonds for a reasonable return. For instance, there were serious doubts whether the movie-rental chain Blockbuster Inc. would be able to avoid bankruptcy or not; however, the chain managed to raise $675 million by selling new bonds. This amount was twice as much as it had wanted in the first place.

Companies such as Harrah’s Entertainment Inc. and MGM Mirage have also scripted similar success stories. Investors don’t mind putting their money into such companies because the bondholders can exchange existing debt for a new debt that matures at a later date or equity in a reconstituted company or both.

According to Michael Imber, involved in restructuring work for the financial advisory firm Grant Thornton LLP, in spite of taking suggested steps, a phenomenal amount of debt is going to be due in the next five years. Along with many other experts, he also believes that a high rate of unemployment and frail market conditions will continue to trouble several businesses.

Overall, no one can forecast revenue, what is certain is, the large number of problems that we are going to face in the future.

written by REI Circle (www.reicircle.com)