U.S. Corporate Bankruptcies to Rise 13% in 2008 According to Global Insight's Sector Risk Ratings Service

Global Insight's World Industry Service Sector Risk Ratings forecast that U.S. corporate bankruptcies are expected to increase 13% in 2008, after rising an estimated 40% in 2007.

The majority of the increases is expected to occur in the agriculture, energy mining, and electronics industries, as well as in banking and real estate.

In general, the "goods" sectors will see their risk profiles deteriorate more rapidly than services, excluding the financial sector. The bright spot for some manufacturers is the outlook for exports, as a weaker U.S. dollar and still-strong growth in the rest of world will mitigate some of the damage from worsening domestic prospects.

We expect construction and real estate to show further risk deterioration due to the long decline in home building and the recent sharp tightening in credit conditions. Because balance sheet strength becomes more important in down cycles, financials and utilities, which are industries with already high levels of indebtedness, are expected to show further deterioration in sector risk in an environment of slower commercial conditions. Weak balance sheets combined with poor income and cash flow will expose these industries to higher default probabilities in 2008.

Industries such as electrical appliances, communication equipment, recreational and cultural services, and retail trade will see a worsening risk profiles as consumer spending is expected to slow. In addition, most of the industries manufacturing electrical and electronics products are net importers of parts from abroad, and with the weakened U.S. dollar, they will have additional pressures due to the deterioration of terms of trade.

Most of the capital goods industries, such as metal and woodworking machinery, electrical industrial machinery, special industry machinery, office and computing machinery, will face pressures on risk ratings in 2008 because of the slower commercial conditions and more cautious business capital spending. Many businesses in the United States still have quite a lot of cash for investments, but volatility in their end-markets will give them more pause before spending. The greatest incentive for capital spending will be to earn a higher export market share, rather than for domestic markets. Another factor is that in the United States, many sub-industries within the capital goods sector have relatively high levels of indebtedness in their balance sheets, which will limit their own flexibility in spending decisions.

Agriculture and chemicals are input industries. They will be hit from slowing demand markets and high oil prices. Agriculture production expenses eat up a high share of the profit. High prices for petroleum and related products are helping to boost demand for ethanol, but they also translated into higher expenses for fuels and fertilizer. In addition, agriculture machinery will show higher risk due to a significant slowdown in agriculture. Food and beverages will be on decline as well because of higher agriculture prices and weaker consumer demand.

Industrial chemicals, such as basic industrial chemicals and synthetic resins, will see their risk ratings deteriorate 30% in 2008. High oil prices will put pressure on input cost and thus squeeze profit margins, while overall slowing of the U.S. economy will subdue demand from key end markets: construction, autos, and consumer-oriented industries. Fertilizers and pesticides are under pressure from the weaker agriculture sector and high natural gas prices. However, in this industry, there are typically strong balance-sheet positions, which should help companies navigate through the business cycle challenges. The petroleum refineries saw an increase in risk profiles in 2007, and their risk ratings will continue to deteriorate in 2008, albeit at a much slower pace.

On the positive side, export-oriented industries, such as metals and related mining, general industrial machinery, professional equipment for scientific, medical and measuring purposes, will likely see stable or even an improvement to their risk profiles due to robust global growth and a weakening dollar.

The healthcare sector will show further improvement in 2008, partly because of its non-cyclical characteristics and strong growth. It has robust prospects for future earnings growth thanks to positive demographics, new technology, and pricing power. Moreover, the healthcare sector has one of the lowest levels of debt ratios, e.g. the debt-to-equity ratio, reflecting a strong liquidity profile.

Global Insight's World Industry Service Sector Risk Ratings forecast for bankruptcies in 2007, released in December 2006, proved to be particularly insightful as it accurately predicted the turning point in the number of bankruptcies. After seeing a record-low number of bankruptcies in 2006, our forecast for a strong rise in 2007 bankruptcies was accurate, as was the prediction that much of the emerging credit stress in 2007 would come from the real estate, mortgage, and housing-related markets.

Global Insight's Sector Risk Ratings are produced as part of the World Industry Service and are updated quarterly. These risk ratings are designed to assist credit analysts and asset managers in identifying the best prospects for movements in sector credit quality on a comparable basis across industries and across countries. For more information and excerpts on the U.S. corporate bankruptcies forecast, please visit www.globalinsight.com/corpbankruptcies.