The Debt Ceiling and Other Dangers

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Americans' serious fears about the U.S. government's debt ceiling stalemate are proliferating and growing in volume as the deadline to pass an increase or face default looms. If you think corporate managers have tuned this fracas out, think again. The threat has grown so big that companies are increasingly mentioning it in their risk disclosures in SEC filings.

The dangers of hitting the ceiling
The folks at Footnoted.com regularly mine the dry legalese of SEC filings for interesting information. Since May 19, the site reports, about 145 company filings have added new prose related to "debt ceiling" or "statutory debt limit."

Earlier, Footnoted found the phenomenon limited to financial and insurance companies with direct exposure to government debt, like KKR (NYS: KKR) and MetLife (NYS: MET) . Now, you'll find those terms mentioned in unexpected places, from apparel company Liz Claiborne (NYS: LIZ) to Noble Energy's (NYS: NBL) most recent quarterly filings.

Footnoted published a slew of companies' risk warnings reflecting the possibly unpleasant effects of the current U.S. economic situation. For example, take Integrated Freight's description of how the ripple effects could trickle down to impact its business:

We believe that without a debt ceiling increase, the U.S. government could default on its obligations, triggering increased interest rates and a decline in gross domestic product, which would involve a reduction in freight shipments.... [W]e believe we [would then] experience higher interest rates and lease payment levels, increased difficulty in obtaining financing for both equipment and acquisitions and a decline in demand for freight transportation.

If you're invested in a company that depends on the U.S. government as a major customer, you might want to fire up the SEC database and look at its recent filings. Take Northrop Grumman's (NYS: NOC) warning:

If the debt ceiling is not raised, it is unclear how the U.S. Government would prioritize its payments and where our payments would fall in that priority list. ... Government contracts provide generally that when funding has been approved..., the contractor will continue to perform on the contract even if the U.S. Government is unable to make timely payments. Failure to continue contract performance places the contractor at risk of termination for default. ... Should conditions occur such that the U.S. Government or others are unable to pay us timely for work performed, we would need to finance that work from our available cash resources, credit facilities and access to the capital markets, if available.

Holy cow. A situation that, in Northrop's words, is "unprecedented in the history of U.S. Government fiscal policy administration"? We do live in interesting times.

Forewarned is forearmed
Maybe it takes an SEC filings geek (and I am one) to get kind of jazzed about this topic, but such fresh and frightening prose cropping up in filings provides a sober reminder for serious investors. First, SEC filings are and always have been an essential source of information. Sometimes it's information you won't find elsewhere -- and sometimes, it's even information companies don't particularly want you to think much about.

The risk factors sections of companies' annual Form 10-K or quarterly Form 10-Q filings lay out all kinds of awful things that could happen in a worst case scenario. That may sound morbid, but in truth, no company's without risk. Companies are required to disclose elements that could hurt their businesses (and your investment).

The best investment decisions honestly assess risks. Similarly, the best corporate governance topics aim to reduce risks to shareholders.

As these debt ceiling warnings reveal, we live in scary times. However that debate ends, the bottom line is that our government's fiscal situation is a shambles. Even if Congress can reach a compromise, our economic stress will not end. I don't think there's any way to sugarcoat the macroeconomic mess we're in.

As responsible investors, we need to know and face what we're up against. It's time to double-check your portfolio and sift through SEC filings to better understand companies' risks. The strongest portfolios will contain the strongest companies, with responsible balance sheets (with very little or no debt), strong moats showing revenue-generating businesses, and prudent management teams. Now is not a time for frivolous investing; it's time to get serious.

Check back atFool.comevery Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

At the time this article was published

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