Finance - Intermediate Accounting - Chapter 14 - Long-Term Liablilities.pdf

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CHAPTERFOURTEEN
LONG-TERM LIABILITIES
Your Debt Traditionally, investors in the stock and bond markets operate in their own separate worlds.
However, in recent volatile markets, even quiet murmurs in the bond market have been
amplified into movements (usually negative) in stock prices. At one extreme, these
Is Killing gyrations heralded the demise of pany well before the investors could sniff out the
problem.
The swift decline of Enron in late 2001 provided the ultimate lesson: pany with
My Stock no credit is pany at all. As one analyst remarked, “You can no longer have an opin-
ion on pany’s stock without having an appreciation for its credit rating.” Other en-
panies, such as Calpine, NRG Energy, and AES Corp., also felt the effect of
Enron’s troubles as lenders tightened or closed down the credit supply and raised interest
rates on already-high levels of debt. The result? Stock prices took a hit.
Other industries are not immune from the negative stock price effects of credit prob-
lems. For example, analysts at compiled a list panies with high debt
levels and low ability to cover interest costs. Among them is Goodyear Tire and Rubber,
which reported debt six times greater than its equity. Goodyear is a classic example of how
swift and crippling a heavy debt-load can be. Not too long ago, Goodyear had a high debt
rating and was paying a good dividend. But with mounting operating losses, Goodyear’s debt
became a huge burden, its debt rating fell to junk-status, pany cut its dividend, and
its stock price dropped 80%. This was yet another example of stock prices taking a hit due
to concerns about credit quality. Thus, even if your investment tastes are in stocks, keep an
eye on the
1Adapted from Steven Vames, “Credit Quality, Stock Investing Seem to Go Hand in
Hand,” Wall Street Journal (April 1, 2002), p. R4 and Herb Greenberg, “The Hidden Dangers
of Debt,”