Default Winners and Losers Article updated with latest developments on the debt reduction deal.
NEW YORK (
) - The House and Senate are scheduled to vote later Monday afternoon on an eleventh-hour deal struck between President Obama and Congressional leaders that will raise the debt ceiling while cutting spending by $2.4 trillion.
The deal, struck late Sunday night, attempts to raise the debt ceiling in two stages. The first stage will see $917 billion in spending cuts over 10 years. A special committee will also be appointed to draft a plan for another $1.5 trillion in deficit reduction through tax-code overhaul and changes to entitlement programs. If the committee does not find at least $1.2 trillion in savings, a pre-set array of spending cuts will kick in, including cuts to defense spending and entitlement programs.
The deal still faces potential hurdles in the House, as liberal Democrats might be upset over the fact that the deficit reduction plan does not call for any tax increases. Conservative Republicans might object to deeper cuts to defense spending and the fact that the immediate plan does not include significant cuts to entitlement programs.
Investors are still hoping that Congress will steer the U.S. away from an outright default. But if the inconceivable does happen, which businesses and investors will be hurt the most?
It is unlikely that any sector will emerge unscathed from a default. Interest rates would soar, consumer confidence and spending would weaken and corporate profits will drop in the immediate aftermath.
However, Los Angeles-based industry research firm IBISWorld has identified ten industries that will be affected the most in the event of a default based on their exposure to interest rates, along with their major players.
The model assumes sharp spikes in interest rates in the event of a default, wherein the yield on a 10-year Treasury climbs to 5% in 2011, 8.8% in 2012 and 9.8% in 2013.
Not all the winners and losers in the list are obvious. Banks, for instance, do not even figure among those that will be worst affected by a default, although an interest rate rise is sure to hurt demand for loans.
Here are 6 winners and losers, starting with the losers.
For the automotive sector, a rise in interest rates is a double-whammy. As a capital-intensive industry, it is hugely dependent on debt. An increase in interest rates will weigh heavily across the supply chain. On the demand side, higher interest rates on car loans will hurt spending.
will be among the worst affected, according to IBIS.
For Ford, the hike in interest rates would come at a time when is trying to pay down its massive debt, which totaled over $100 billion in 2010.
The company cut debt by $2.6 billion in the second quarter. Reducing its leverage is crucial in order for the company to win an investment grade rating. But that goal might be farther from its reach in the event of a sovereign debt downgrade.
Ford is already coping with a difficult operating environment as commodity costs have increased and the economic outlook appears weak.
Ford reported revenue growth of 13% in the second quarter to $35.5 billion. Net income fell to $2.4 billion or 59 cents per share, lower than the year-ago quarter profit of $2.5 billion or 61 cents per share.
The automaker said sales of light vehicles will likely come in the lower end of its 13 million to 13.5 million forecast.
5. Standard & Poors
Standard and Poors
, owned by
( MHP) is in the spotlight as investors await its decision on a possible downgrade to U.S. debt. The rating agency has said that a $4 trillion target long-term deficit reduction plan would be necessary for the U.S. to maintain its debt rating.
Any deal would have to win bipartisan support so as to convince the agency that it won't be undone, sovereign-rating chief John Chambers said in a recent webcast.
But ironically, rating agencies stand to lose in the event of a downgrade, according to this list.
Higher interest rates might reduce the volume of fresh debt issuances, which means less demand for the rating services of companies like S&P.
Similarly the securitization market is also likely to slow as investors will likely turn skittish over riskier debt following a sovereign downgrade.
IBIS World also lists
as other companies that will be negatively affected.
4. General Growth Properties
The commercial leasing industry might be negatively affected in the event of a default because rental space might find fewer tenants in the event of a slowdown, making it harder for them to offset high fixed costs.
The list identifies
General Growth Properties
as a company that could be affected. The company, which counts
as a major investor, operates shopping centers in the U.S.
General Growth emerged from bankruptcy last November. Since then it has been taking advantage of lower interest rates to refinance its mortgages. That effect won't last if there is a default.
Rental incomes will also come under pressure as retailers encounter poor consumer spending.
Already, cautious shopping habits of consumers has hurt business. Regional mall vacancies reached 9.3%, its highest level in 11 years in the second quarter as department stores closed and retailers scaled back expansion plans according to preliminary data from Reis.
Higher vacancy rates squeeze rental income, while fixed costs for mall operators remain high.
Simon Property Group
Vornado Realty Trust
will also be negatively affected, according to IBIS.
"I'm known for checking our accounts receivable every month when I get the report. And they (the U.S. government) are always 30 days delinquent," David Simon, CEO, Simon Property Group told Reuters, commenting on the debt crisis. "But beyond that, we don't see any real risk. Spreads will invariably widen for all of corporate America and for all asset classes. So we'll be a participant in that, but beyond that, we can't see anything that's going to be anything material."
Read on now for the winners.
, which supplies machinery to the agriculture and construction industries, may be positively affected in the event of a default, according to IBISWorld.
With a significant chunk of its revenues coming from emerging markets, Deere will likely continue to enjoy good demand. A default will also pressure the dollar which will boost export revenues.
According to its lead analyst Justin Molavi, Deere would also benefit because higher interest rates will push more people to rent equipment in the U.S., giving a boost to its equipment leasing business.
Deere posted a second-quarter net income of $904.3 million or $2.12 per share compared with $547.5 million or $1.28 per share last year, helped by strong demand for farm machinery.
are among the other industry players who are expected to benefit.
2. Your Retirement Fund
IBIS identifies retirement and pension plans as likely to be positively affected by a default. While existing bond holdings could take a hit on a downgrade, over the long term the gains from higher interest income will help, according to Molavi.
Federal Retirement Thrift Investment Board
California Public Employees' Retirement System
California State Teachers' Retirement System
The New York State and Local Retirement System
are listed as key major players.
Separately, IBIS also lists open-end investment funds as likely beneficiaries. That includes companies like
, which manages $3.7 trillion in assets and is a major player in fixed income markets.
Blackrock benefited from an investor flight to safety in the second quarter, with new business flowing towards fixed income and multi-asset classes and out of equity. The world's biggest money manager said investment fees grew 17% to $2.1 billion in the second quarter from the year-ago period, as assets under management increased both due to fresh inflows and market appreciation.
1. Bill Gates
founder Bill Gates' $37 billion philanthropic organization, the
could benefit from a higher interest rate scenario according to IBIS, adding a small silver lining to the default scenario.
The Foundation focuses on solving problems of extreme poverty and poor health in developing countries, while in the U.S. it is working on improving the education system.
Billionaire investor Warren Buffett has teamed up with Gates in their charitable effort. In 2006, he announced that he would start giving much of his fortune to philanthropic causes, including a pledge to donate 10 million shares of
( BRK-A) stock to the Bill & Melinda Gates Foundation Asset Trust.
In the 2011 annual letter, Gates made a special plea to governments to not cut their foreign aid. "Although foreign aid accounts for less than 1 percent of governments' total budgets, it is one place being considered for cuts. As a result, health and agricultural assistance that saves lives and puts poor countries on a track for self-sufficiency is at risk," he wrote.
"..In the past some aid was sent to countries to buy friendship without real regard for its impact. However, today a significant portion of foreign aid is spent on hugely beneficial programs that improve people's lives in both the near and long term."
--Written by Shanthi Bharatwaj in New York
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