Watching the debt ceiling with KKR & MetLife…

May 19, 2011

All eyes in official Washington are on the debt ceiling, that self-imposed borrowing limit that was technically reached on Monday. By temporarily halting federal retirement-fund investments, the day of reckoning — that is, absent an increase in the limit, the day the federal government would have to decide whether to default on its debt or sharply slash Social Security, Medicare, and/or defense spending — can be pushed to August. What happens then, and just how likely the dire scenario is, depends on your choice of politicos and pundits. Suffice to say it might well be ugly.

The noise over the subject in Washington contrasts sharply with the a near silence on the matter in the formal disclosures of the country’s biggest companies. Publicly traded companies are supposed to disclose their litany of potential woes — their Risk Factors — each year in their 10-K filings, and update them at least quarterly, as changed circumstances warrant. But so far, we’ve noticed just two companies sounding the alarm.

MetLife is circumspect about its concerns, which it disclosed in the 10-Q it filed on May 10 by working them into a longer, existing risk factor warning that “Difficult Conditions in the Global Capital Markets and the Economy Generally May Materially Adversely Affect Our Business…” After noting that market and economic volatility can affect both the company’s investment portfolio and its claims payable, and pointing to concerns over European sovereign debt, the company continues:

“In the event political discord in the U.S. prevents agreement on a national debt ceiling or budget, the U.S. could default on obligations, which would further exacerbate concerns over sovereign debt of other countries.”

Then it goes on to warn about the Japanese economy in the wake of the earthquake, tsunami and nuclear crisis there, and the potential consequences of these various situations generally.

KKR is more specific in the 10-Q it filed on May 5, disclosing a new risk factor dedicated to the debt ceiling, titled “A failure or the perceived risk of a failure to raise the statutory debt limit of the United States could have a material adverse effect on our business, financial condition and results of operations.” KKR continues that failing to raise the debt limit

“would increase the risk of default by the United States on its obligations, as well as the risk of other economic dislocations. Such a failure or the perceived risk of such a failure consequently could have a material adverse effect on the financial markets and economic conditions in the United States and throughout the world. It could also limit our ability and the ability of our funds and portfolio companies to obtain financing, and it could have a material adverse effect on the valuation of our portfolio companies and other assets held by our funds. Under such circumstances, the risks we face and any resulting adverse effects on our business, financial condition and results of operations would be significantly exacerbated…”

It’s a little curious that so few big companies seem to be concerned. While unique in their own way, both KKR and MetLife are squarely in the mainstream of the financial-services sector; presumably, anything affecting them would affect competitors. Nor is it like this is a new development that was off the radar screen until very recently, meaning some companies might just have filed before it became a big enough deal: The debt-ceiling debate has been heating up for weeks.

Of course, risk-factor disclosures are a curious beast: While they sometimes seem to include the kitchen sink, they don’t have to encompass risks that managers consider so remote as to be irrelevant. (We note, for example, that not a single company appears to have warned about much-publicized predictions by some religious groups that the world will end on Saturday. Though that might make for a pretty interesting going-concern clause.) So maybe everyone else thinks the threat is remote, and KKR and MetLife are the Chicken Littles of the stock market.

Then again, whatever the odds of an actual default by the U.S., at least a couple big companies with seemingly smart management are sounding alarms. What do the other corporations know that KKR and MetLife don’t? Or are other companies simply oblivious to the danger that lurks in the federal budget follies?

Image source: Architect of the Capitol

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