Raising the debt-ceiling alarm…

July 29, 2011

Last we checked, about two weeks ago, companies didn’t have a lot to say about the budget brouhaha in Washington. A few companies were warning of unpleasant consequences if federal lawmakers didn’t get their acts together one way or another, but for the most part, it was a sideshow. With the drama in the Beltway intensifying, we thought we’d take another look.

And company executives and lawyers have started to take notice in earnest: At least 61 filings have used the phrase “debt ceiling” or “statutory debt limit” since our July 14 post, roughly as many as did in the first 5-1/2 months of the year, leading up to our initial debt-ceiling post, about KKR and MetLife. (In the 10 weeks since May 19, a total of about 145 filings have mentioned the terms.) And of course, that doesn’t include other filings that refer to the debt-ceiling debate in different terms.

Moreover, early on we were mostly seeing warnings crop up in the filings of insurers and other financial companies — those directly involved in the government debt markets in one way or another. Now we’re seeing warnings crop up more varied places, from fashion houses to wood-products companies.

Clothing company Liz Claiborne (LIZ), for example, has added the “impact of a failure to increase the debt ceiling in the United States” to its laundry-list of potential pitfalls under its “Statement Regarding Forward-Looking Statements” at the start of its latest 10-Q. Its last quarterly report didn’t mention the risk though the debt ceiling was already a topic of Beltway banter in mid-April.

Liz Claiborne didn’t get very detailed. Others have been more explanatory, including Noble Energy (NBL), in the 10-Q it filed on Thursday:

“A failure by the U.S. Congress to lift the debt ceiling or a downgrade of U.S. Sovereign debt could result in incrementally higher term borrowing costs. Higher treasury yields are likely to result from any default scenario or from events that ultimately lead to a ratings downgrade and the loss of AAA sovereign debt status. Inasmuch as U.S. Treasury yields serve as the risk-free rate and function as a base rate for U.S. dollar based lending rates, higher treasury yields would likely translate into higher long term borrowing costs for all corporations. Our short term financing costs could also rise if it becomes more expensive for our banks to source Libor based funding via the interbank loan market.”

Echoing Noble Energy are companies like Integrated Freight (IFCR), a tiny $7-million-market-cap trucking company, which warns in the amended 10-K it filed Monday: “In the event the federal debt ceiling is not raised or a raise is delayed, we would expect to experience an increase in our costs of borrowing.” Moreover, Integrated Freight adds later,

“We believe that without a debt ceiling increase, the U.S. government could default on its obligations, triggering increased interest rates and a decline in gross domestic product, which would involve a reduction in freight shipments. If the U.S. debt ceiling is not raised in time to avoid default on U.S. government obligations, we believe we will experience higher interest rates and lease payment levels, increased difficulty in obtaining financing for both equipment and acquisitions and a decline in demand for freight transportation.”

Drugmaker Mylan (MYL) sticks its debt-ceiling warning at the top of a 20-page list of potential calamities, above the risk of integrating acquisitions and terrorist attacks. In its Wednesday 10-Q, Mylan comes at it from a slightly different direction, lumping the failure to raise the debt ceiling in with potential default by (we’re assuming) Greece, and warning of the impact on customers:

“In particular the risk of a debt default by certain European countries or the failure of the U.S. government to raise its debt ceiling could negatively impact the global economy. This has led, and/or could lead, to reduced consumer and customer spending and/or reduced or eliminated third-party payor coverage or reimbursement in the foreseeable future, and this may include spending on healthcare. While generic drugs present an ideal alternative to higher-priced branded products, our sales could be negatively impacted if patients forego obtaining healthcare, customers reduce spending or purchases, and/or if third-party payors reduce or eliminate coverage or reimbursement amounts.”

Then, of course, there are the government and defense contractors — among those who could find themselves stiffed by the Treasury if the debt ceiling isn’t raised in time. And in the grand scheme of those the government could stiff, we can’t help but assume that government contractors top the list, as opposed to, say, China or Social Security pensioners.

Of course, the federal government is bound by its contracts just like the rest of us, so we’re also pretty sure those contractors would ultimately get paid, with interest. The contractors seem reasonably confident as well, to judge from their filings, but they’re being cautious anyway, given that they may well be obliged to keep working even if they aren’t being paid.

Here’s how Northrop Grumman (NOC) put it in the 10-Q it filed Wednesday:

“If the debt ceiling is not raised, it is unclear how the U.S. Government would prioritize its payments and where our payments would fall in that priority list. A significant portion of our work is performed directly or indirectly under U.S. Government contracts that provide generally that when funding has been approved by the customer (through the budgetary and appropriations process …), the contractor will continue to perform on the contract even if the U.S. Government is unable to make timely payments. Failure to continue contract performance places the contractor at risk of termination for default. In such circumstances where performance is continued in the absence of payment, the contractor may be entitled to certain interest on amounts not paid within a specified time period. Such conditions are unprecedented in the history of U.S. Government fiscal policy administration … Should conditions occur such that the U.S. Government or others are unable to pay us timely for work performed, we would need to finance that work from our available cash resources, credit facilities and access to the capital markets, if available.”

Northrop Grumman goes on to say that it doubts such a worst-case scenario would last long, and that it’s pretty sure it would have the borrowing capacity to weather it. Oshkosh Corp. (OSK) says in its Thursday 10-Q that without a debt-limit increase by August 2, “it is likely that some payments to U.S. government contractors such as us will be delayed or deferred.” Lockheed Martin (LMT) says in the 10-Q it filed on Wednesday that it believes “key defense, intelligence, and homeland security programs would receive priority,” but that it could turn to the credit markets if necessary. (Lockheed Martin had raised the debt-ceiling issue in its prior 10-Q.)

While we were surprised to see so few substantive references to the debt-ceiling debate a couple of weeks ago, it’s clear that corporate officers and securities lawyers have been making up for lost time. Now it remains to be seen if lawmakers can craft a deal in time to make the warnings superfluous.

Bonus link: The New York Times has a great series of charts that break down the national debt from a number of different angles, including who holds it and which presidential administrations racked it up. It’s good context wherever you fall in the current debate.

Image source: Architect of the Capitol

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