Debt Ceiling Debate: A Threat to Corporate America?
By THEO FRANCIS,
Posted: May 21, 2011
The Beltway battle over the debt ceiling, with its uncertain end-game, has so far been framed mostly as a policy and macroeconomic drama. Now a small group of American companies are starting to sound alarms, and it raises a serious question: Are these aberrations, or is the rest of corporate America ignoring the risk?
Two of the biggest companies to warn of fallout from the debt-ceiling fight are life-insurance giant MetLife and private-equity powerhouse KKR. MetLife is brief in its warning, which appears in the quarterly report it filed May 10. It's wrapped into a broader "risk factor" disclosure about "difficult conditions in the global capital markets and the economy," and warns of market and economic volatility more generally before adding:
"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."
KKR is more specific. With its quarterly report filed on May 5, it added an entirely new section to its risk factors, warning of potential harm from a "failure or the perceived risk of a failure to raise the statutory debt limit of the United States..." It said default, or even just the fear of default,
"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..."
Financial firms aren't the only ones worried about the debt ceiling. Hansen Medical, a small maker of medical robots in Mountain View, Calif., warns in its May 10 quarterly report that failure to resolve the impasse could lead to a partial government shutdown, potentially affecting the Food and Drug Administration — and pending approvals for the company's vascular robotic system.
Seattle Genetics, a biotech company focusing on cancer and autoimmune disorders, warns in its May 6 quarterly report that
"Uncertainty surrounding … increases to the federal debt ceiling similarly could impact the trading market for U.S. government securities. These factors could impact the liquidity or valuation of our available-for-sale securities, 97% of which were invested in U.S. Treasury securities as of March 31, 2011."
Publicly traded companies are supposed to disclose their “Risk Factors” in annual filings with the SEC, and update them at least quarterly, as circumstances warrant. Of course, these disclosures 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 May 21).
So far, only a handful of companies have disclosed concerns about the debt ceiling. Does this mean the others are out of the woods -- or is it simply an indication that other companies don't yet recognize the risk, are counting on politicians to avert a true crisis, or do not believe a default would affect them?
Theo Francis is a senior reporter at footnoted.com, a publication of financial information company Morningstar Inc. that analyzes corporate disclosures.