NEW YORK (The Deal) -- Government contractors spent a couple of years in the wilderness coming out of the great recession, hampered by political squabbling that led to payment and contract award delays and left companies stuck in neutral. Talk of a potential government shutdown has returned, and unfortunately some of these companies are no better prepared this time around.
CNN reported Thursday that Sen. Ted Cruz (R-Texas) plans to meet with Republican colleagues to discuss options to defund Planned Parenthood and block funding to other politically charged White House initiatives. Cruz, one of the key architects of the 2013 shutdown and budget battles, has said no option is off the table as Congress nears an October deadline to once again raise the U.S. debt ceiling.
Most analysts believe the debt ceilingwill eventually be raised and a government shutdown can be averted, but as history has shown there can be considerable delays and theatrics in Congress before we get there. The U.S. Treasury is likely to use what it calls extraordinary measures to maintain federal spending levels if Congress drags its feet, and in years past that has meant prioritizing payments and delaying reimbursement to defense contractors.
Moody's Investor Services senior analyst Bruce Herskovics says defense contractors have seen little change in their liquidity levels since 2013, and some, including defense titanNorthrop Grumman(NOC) - Get Report , have become more vulnerable.
Northrop, with a $31 billion market cap, and smaller companies that are vulnerable to a payment slowdown are extremely unlikely to face the prospect of a bankruptcy or massive restructuring should a government shutdown occur. But investors should be on notice that issues in Washington could affect quarterly results, and perhaps further delay a long-awaited turnaround for smaller contractors that remain reliant on government funding.
Using a formula that measures a company's current liquidity and available sources of cash relative to its estimated reliance on federal contracts, Moody's has identified a number of so-called Beltway Bandits -- small to mid-sized contractors -- as among the most vulnerable. That is a list that includes CACI International(CACI) - Get Report , Science Applications International(SAIC) - Get Report , Kratos Defense & Security Solutions(KTOS) - Get Report , Leido Holdings(LDOS) - Get Report and privately held Dyncorp International.
These companies, and others including ManTech International(MANT) - Get Report and KeyW Holding(KEYW) - Get Report , have in recent years made acquisitions in an effort to reduce their exposures to the government but still remain highly susceptible to payment delays and the possibility of further austerity.
A defense banker noted that even the threat of a shutdown could make these companies more timid, especially given the recent history of government delays, and potentially further put off a much-needed round of consolidation among smaller contractors. And any threat to cash flows could reduce the appetite of private equity firms, a consistent source of liquidity in the sector for more than two decades.
There's a joke among government contractors that the best way to gauge the health of the overall economy is to see how interested commercial-focused firms are in grabbing Uncle Sam as a customer, the idea being that although the government can be hard to deal with, at least it pays its bills.
That assumption has been challenged in recent years. A lot of companies spread around the Washington suburbs, as well as their investors, are hoping this time around Congress is able to get its work done quickly.
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