Moody's, tell us something we don't know

A stunning revelation by Moody's, from marketwatch.com:

Corporate defaults to surge, Moody's says
Credit crunch cuts off access to borrowing for weaker companies

SAN FRANCISCO (MarketWatch) -- The credit crunch has cut off access to borrowing for many weak companies, which will trigger a surge in corporate defaults, rating agency Moody's Investors Service said Tuesday.

What began as a subprime mortgage problem earlier this year has spread across other credit markets. Investors are still willing to lend money to financially stronger companies, but demand for new debt issued by less creditworthy firms has been "largely wiped out," Moody's said in a report.

Few companies have struggled to repay debt in recent years, mainly because booming credit markets allowed weak businesses to get rescue financing to avoid bankruptcy. However, this summer's credit crunch has changed all that, Moody's said.

"Going forward ... many more weak companies will be unable to obtain new financing and will default either when debt maturities come due or when they run out of cash," the agency said.

The default rate among U.S. speculative-grade companies will more than double to 4% during the next year, Moody's predicted.

Homebuilders, auto makers, retailers and consumer durable companies may be most affected, Moody's said. Many companies in these industries have been acquired in leveraged buyouts in recent years and have borrowed a lot of money in the process, the agency said.

"The bumper crop of highly leveraged new issuance in 2006 and 2007 expanded the number of these low-rated, highly leveraged issuers to a record level," Moody's said. "We expect defaults to rise substantially among the large population of companies that have been aggressively financed with less than two times EBITDA/interest coverage and little or no free cash flow."

True to form the ratings agencies are well behind the curve pointing out the obvious well after the fact. Of course companies that need to continually borrow just to stay afloat are going to implode in the current environment and rightly so. A quick look at the Mortgage Lender Implode-O-meter is all you need to confirm that.

Is it any surprise that companies can't roll over their short term paper with corporate credit spreads widening and a complete aversion by market participants to riskier issues?. No, and besides, any business that needs to continually borrow just to stay afloat is not a business worth being in - as more will find out in the months ahead.