Keep a debt bomb from damaging your portfolio

Stocks have fallen 2% so far today. In the context of recent volatility, that’s not a big deal. What is a big deal is that executives at GM are apparently preparing to declare bankruptcy, a move that would affect hundreds of large and small companies that do business with the automaker. general-motors-gm-logo

GM has the typical profile of a bankruptcy candidate – a large amount of debt and not enough cash flow to make those debt payments. Investors will not be surprised if GM goes bankrupt without getting more government aid.

But what some investors might not appreciate in their own stock portfolios is that even their profitable companies might run into serious trouble as long as the credit markets stay tight. In the past, if a company had a few hundred million dollars worth of bonds maturing, instead of having to write a gigantic check at once, the company would simply issue new bonds to refinance the debt. But now, both large and small companies have found it extremely difficult to “roll over” (i.e. refinance) their bonds when they mature.

Value investor Ed Maran, a portfolio manager with Thornburg Funds, told me that he checks the debt schedule of the companies he owns to make sure they don’t have large amounts of debt maturing in the next three years. If they do, they’d better have enough cash on hand to pay that debt off. Otherwise, even a company that shows a healthy profit on their income statement can be forced into bankruptcy.

If you want to see when your own stocks’ debt matures, go to the company’s annual or quarterly report and look in the footnotes of the balance sheet. I’ll have more on the subject in this month’s issue of Money Magazine.

– Joe Light

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4 comments so far

  1. Wealth Pilgrim on

    Had Chrysler NOT been bailed out 2 decades ago, would GM have gotten a wake-up call? Would they possibly have changed course?

    • investwisdom on

      Good point and who knows…though it’s also important to note that Chrysler paid the money back and the government actually made interest on that particular bailout. Not saying that it should or shouldn’t have happened…just saying.

  2. Wealth Pilgrim on

    Understood. I do remember that they did in fact pay it back. Just wondering if it set a very bad tone…….

    When I was a kid and I was learning how to ride a bike, I rode very differently when the training wheels were still on vs when they were off. I knew I couldn’t get hurt.

    GM has been acting like the training wheels are still on. I bring this up only because I think its time to take those training wheels off now – and let the folks at GM know they better put their helmets on.

  3. investwisdom on

    Good points. It will be interesting to see what happens in two months or so when GM presents its new restructuring plan. Thanks for reading.


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