Interest Ratio Coverage (from WSJ)

What Is the Interest Coverage Ratio?

It measures a company’s ability to make its debt payments. Why it matters

The ratio can be calculated by dividing operating income—typically defined as earnings before interest and taxes, or EBIT—by its interest expense. (There are variations, but this is the simplest.)

“If your coverage ratio is 1, then you have no cushion,” says Dan Gode, accounting professor at the New York University Stern School of Business. Simply: When a company’s operating earnings are equal to its borrowing costs (giving it a coverage ratio of 1.0), there is no margin for error. If the business meets a rough patch and earnings drop, then the company might not be able to pay the interest on its loans. “If the ratio is north of 3 or 4, then you have some cushion,” Prof. Gode adds.

Speculation over the Federal Reserve’s interest-rate intentions comes into play. Higher interest rates for corporate borrowing will push coverage ratios down unless profits increase. For some companies, that won’t matter much; for others, it will make an already heavy debt burden harder to bear.

“Overall corporate debt might not be high, but that masks great variation” among firms, Prof. Gode says. He points to Apple Inc. as a cash-rich company with relatively little debt. “And then there are plenty that have huge levels of debt,” including some energy companies and hospitals.

Mr. Constable is a writer in New York. He can be reached at reports@wsj.com.

Companies Likely to go Bankrupt Next (according to auditintegrity.com. )

Audit Integrity Announces Results of Corporate Bankruptcy Study; Identifies Companies Most Likely to Declare Bankruptcy
Wed Sep 16, 2009 9:00am EDT

Media and Transportation Sectors Have the Highest Number of Companies at Risk
LOS ANGELES--(Business Wire)--
In response to amplified concern in the market for risk related to corporate
insolvency, Audit Integrity, an independent financial research and risk modeling
firm, today released the results of its bankruptcy model research and has
identified 20 corporations, with $1 billion or more in market capitalization,
that have the highest probability of declaring bankruptcy in the next twelve
months.

According to the U.S. Bankruptcy Courts, the number of business bankruptcy
filings during the first six months of the year rose 64 percent over the first
half results in 2008. With the increased incidence of company failures,
corporate stakeholders such as insurance companies, auditing professionals,
procurement executives and regulators, find corporate survival to be a critical
risk issue.

Current approaches to determining bankruptcy risk generally fail to react
quickly to changes to the economic environment, and do not factor in the
potential for corporate fraud. By incorporating these risk factors into the
Audit Integrity Business Risk Model, this new approach has been found to greatly
improve the identification of companies at risk of bankruptcy. Against the most
widely used bankruptcy model, the Altman Z-Score, the Audit Integrity bankruptcy
Risk Model results have been more than 20 percentage points higher in predicting
bankruptcy.

The results from Audit Integrity`s bankruptcy research indicate that the media
and transportation industries are especially vulnerable. Of the over 2,500 U.S.
corporations receiving bankruptcy risk scores from Audit Integrity, TV and
Publishing companies were found to be over four times as risky as other
companies, while automobile and airline industries were just slightly less
risky.

The findings suggest that fraudulent accounting and poor governance impact
bankruptcy risk in addition to more generally accepted factors such as measures
of liquidity, leverage and profitability.

"Evidence shows that bankruptcy filings tend to lag after an economic downturn
so its extremely important that investors and those concerned with the risks
around corporate failure mitigate their exposure to companies likely to
collapse," said Jack Zwingli, CEO of Audit Integrity. "Market volatility and
sudden downturns such as we have been experiencing must be factored into
bankruptcy risk. Fraud also plays a part, especially when companies are faced
with survival decisions. These are the toughest companies to identify because,
on paper, they appear solvent. Our model uncovers the underlying fraud that can
be behind seemingly healthy financial statements."

Audit Integrity has identified the following companies that have the highest
probability of declaring bankruptcy among publicly traded firms with more than
$1 billion market capitalizations:

* Advanced Micro Devices, Inc.
* Amkor Technology, Inc.
* AMR Corporation
* Apartment Investment and Management Co.
* CBS Corporation
* Continental Airlines, Inc.
* Federal-Mogul Corporation
* Hertz Global Holdings, Inc.
* Interpublic Group of Companies, Inc.
* Las Vegas Sands Corp.
* Liberty Media Corporation (Capital)
* Macy's, Inc.
* Mylan Inc.
* Oshkosh Corporation
* Redwood Trust, Inc.
* Rite Aid Corporation
* Sirius XM Radio Inc.
* Sprint Nextel Corporation
* Textron Inc.
* The Goodyear Tire & Rubber Company

To get the full list of companies Audit Integrity has identified, including
small-cap and mid-cap firms, please visit www.auditintegrity.com or call
877-880-8820.

About Audit Integrity

Founded in 2002, serving investors, insurers, auditors and corporate finance
professionals, Audit Integrity is a leading independent research firm that rates
more than 12,000 public companies in North American and Europe based on their
corporate integrity. In addition to its flagship Accounting and Governance Risk
(AGR) ratings, Audit Integrity also forecasts bankruptcy risk, class action
litigation risk, material financial restatement risk, and equity performance
risk. The statistical correlation of these ratings has been confirmed by
internal and third-party tests. Audit Integrity has offices in Los Angeles and
New York City. For more information, please visit www.auditintegrity.com.





Starkman & Associates
Jeffrey Richardson, 212-252-8545, ext. 11
jrichardson@starkmanpr.com
or
James Cheston, 212-252-8545, ext. 22
jcheston@starkmanpr.com

Copyright Business Wire 2009

GM financials point toward Bankruptcy (Bloomberg News)

GM Loss Widens to $5.98 Billion as Bankruptcy Looms (Update1)

By Jeff Green and Katie Merx

May 7 (Bloomberg) -- General Motors Corp. said its first- quarter net loss widened to $5.98 billion as sales plunged by almost half, ratcheting up the prospect of a bankruptcy filing by a U.S.-imposed June 1 deadline.

The net loss of $9.78 a share swelled from $3.3 billion, or $5.74, a year earlier, Detroit-based GM said today. Revenue tumbled 47 percent to $22.4 billion, while cash consumption almost doubled from the previous quarter.

The results add to the pressure on GM as it races to cut costs and debt to avoid bankruptcy. With bondholders resisting a plan ordered by the Obama administration to exchange $27 billion in debt for a minority stake in a reorganized GM, the 100-year- old automaker may end up in court.

“If the deadline for proving viability is a few weeks away, these earnings would indicate to me that it’s nearly impossible to get there,” said Kevin Tynan, a New York-based Argus Research analyst who advises selling GM. He said “a clean slate from bankruptcy” may be the best way to return to profit.

GM is ready to go “in and out quickly” should it need to file for bankruptcy, Chief Financial Officer Ray Young told reporters at the automaker’s headquarters. The proposed debt exchange with bondholders is the biggest piece of $44 billion in obligations that GM is working to shrink as it survives on $15.4 billion in emergency federal aid.

Cost Structure

“The first-quarter results reinforce the plan we announced at the end of April to bring our cost structure down aggressively,” Young said.

Excluding some costs, the first-quarter loss was $9.66 a share, or $5.9 billion, GM said. That beat the average $10.97 loss estimate from 11 analysts surveyed by Bloomberg.

The biggest U.S. automaker used $10.2 billion more in cash than it generated from operations, almost twice as much as the consumption of $5.2 billion in the fourth quarter. Cash on hand at the end of March was $11.6 billion, a decrease from $14.2 billion as of Dec. 31, as new government aid partially offset the drain on GM’s reserves.

Young said the cash use was less than GM projected in a February report to the U.S. Treasury, in part because of $3 billion in structural cost reductions in the quarter. He reiterated that GM will need $2.6 billion in U.S. Treasury funds in May and $9 billion more after that.

GM dropped 6 cents, or 3.6 percent, to $1.60 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have declined 50 percent this year for the worst performance in the Dow Jones Industrial Average, and they may be removed, said John Prestbo, the editor and executive director of Dow Jones Indexes.

‘Revenue Implosion’

GM slashed quarterly output by about 40 percent to 903,000 vehicles as demand waned, which accounted for “the revenue implosion,” Young said.

The net deficit included one-time gains from erasing some debt and charges such as $822 million in costs related to the Feb. 20 bankruptcy of its Saab Automobile AB unit, which GM wants to unload. Before today, losses at the company totaled $82 billion since 2004, its last profitable year.

President Barack Obama set the June 1 bankruptcy deadline on March 30, giving GM 60 days to restructure out of court. He rejected the company’s original plan to shed 47,000 jobs this year and cut about $28.5 billion in union and bond debt, saying it wasn’t enough to return the automaker to viability.

Under the survival plan unveiled April 27, GM agreed to kill the Pontiac brand, close two more plants and eliminate at least 7,000 more union jobs by the end of next year. GM said today it expects to cut more salaried and executive jobs, without elaborating.

U.S. Control

GM’s plan envisions that the U.S. would control at least 50 percent of 60 billion shares in a restructured company, and a union-run health-care fund would get as much as 39 percent. Unsecured bondholders would get 10 percent and existing shareholders would get 1 percent, GM said.

Bondholders would receive 225 shares in the new automaker for each $1,000 in principal. When the exchange is complete, GM would do a 1-for-100 reverse split of the stock.

Without support from 90 percent of the bondholders by May 26, GM plans to file for bankruptcy, Chief Executive Officer Fritz Henderson said after unveiling the offer.

Bondholders countered that proposal with a plan calling for GM to give them 58 percent of the equity in the reorganized company. Henderson told reporters earlier this week that the Treasury has indicated it “would not be supportive of shareholding in excess of 10 percent” for the bondholders. GM’s 8.375 percent bonds due in July 2033 fell 0.35 cent to 8 cents on the dollar, yielding 102 percent, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. Dwindling Sales

The discussions among GM, Obama’s car task force and the bondholders are unfolding against a U.S. auto market that shrank 34 percent last month.

GM reported an adjusted automotive operating loss of $3.9 billion in the first quarter, wider than the $808 million deficit a year earlier.

Each of the automaker’s regions experienced a drop in earnings from a year earlier due to slumping sales, with the $3.2 billion operating loss in North America the worst deficit.

Without a new cost-saving labor agreement, GM’s Canada unit will be liquidated, the Canadian Auto Workers union said today, citing discussions with government officials. CAW leaders told reporters in Toronto they had been ordered back to the bargaining table with GM under a May 15 deadline to reach an accord or lose the possibility of more government aid.

Young said there were sales bright spots in such markets as China, Germany and Brazil, where governments implemented programs to stimulate demand. Results in those countries support GM’s argument in favor of U.S. incentives to promote auto purchases, he said.

“We just need to get this bankruptcy speculation and rumor behind us,” Young said during a conference call. “That’s clearly having an impact on our sales.”

To contact the reporters on this story: Jeff Green in Detroit at jgreen16@bloomberg.net; Katie Merx in Detroit at kmerx@bloomberg.net.

Last Updated: May 7, 2009 16:21 EDT