The Problem Of "Burn Rate" Hits Mainstream Companies (GM)(PIR)(DS)(SIRI)(CHTR)(MNI)(NYT)`

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At the beginning of the decade a number of internet and next-generation technology companies raised money through venture capitalists and IPOs. Many of these companies had little, if any, revenue. Most had relatively high expense structures.

As these firms quickly ate through the cash on their balance sheets and continued to have poor sales prospects, the term "burn rate" was coined. If was defined as the amount of cash a company had on its balance sheet divided by the firm’s monthly expenses less any revenue. An operation with $12 million in cash less short-term debt and a $1 million a month "burn rate" was expected to be out of business in a year.

At this point, GM (GM) and Chrysler would make any burn rate risk lists as would a number of retailers who had awful holiday seasons and are facing repayment of debt or revolving credit facilities. That is why Pier 1 (PIR) is trading at $.40 and shares of Dillard’s (DDS) are off 80% over the last year.

The use of the term has almost disappeared but it is likely to re-emerge now and refer to companies which are more mature and part of the mainstream economy. With credit nearly impossible to come by, operations with high debt and negative operating income are going to be defined by how long the capital they have access to will last.

Sirius XM (SIRI) is the most well-known company with a burn rate problem. It has about $1 billion in debt due this year, and has been running an operating deficit which is shrinking but may not go positive before the company becomes insolvent. At the end of its September quarter, it had $360 million in cash. The modest cash position and high debt accounts for a $.13 stock price.

Another company which is almost certainly to be taken under by its burn rate is Charter Communications (CHTR). With $21 billion in debt and interest coverage that is overwhelming its operating income, Charter may not make it until the end of the quarter.

The newspaper industry is being crippled by the burn rate problem. Big chains Journal Register and Gatehouse are already at the edge of insolvency. McClatchy (MNI), the country’s third largest newspaper company may well have debt service problems this year. Even The New York Times (NYT) is facing a $400 million debt payment later this year and does not have the cash on hand to cover it.

Unless the credit markets unlock at a furious pace, there will be a lot of well-known companies going into bankruptcy this year.

Douglas A. McIntyre