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Mercer Capital Management, Inc.

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Mercer Capital Analysis Shows that Corporate Balance Sheets May Hold Clues to Recent Economic Downturn

Although much attention has been paid to the balance sheets of financial institutions, Mercer Capital's recent analysis of corporate balance sheets shows that industrial goods manufacturers spent 2007 preparing their balance sheets for a downturn, suggesting that a closer examination of corporate balance sheets may hold clues to the recent economic downturn in the United States.

Memphis, TN, March 15, 2008 --( As the credit woes from the U.S. sub prime meltdown extend to other areas of the economy, the balance sheets of financial institutions are under increasing scrutiny. Now, as global liquidity concerns wreak havoc with various credit derivatives, many corporate borrowers are facing rapidly escalating financing costs.

A March 10, 2008 article on noted that uncertainty surrounding credit trading models are pushing the spread between interest costs for corporate borrowers over U.S. treasuries to the highest levels in over a decade. On March 7, 2008, the average yield on AAA-rated corporate bonds (5.57%) exceeded the average yield on 10-year treasury bonds (3.56%) by almost 200 basis points. One year earlier, the spread was just under 75 basis points.

Recent analysis by Mercer Capital reveals that the sub prime debacle did not affect the aggregate financing mix for corporate borrowers during 2007. Mercer Capital analysts tracked reported debt levels for 404 non-financial companies in the S&P 500 during the year. Net of reported cash balances, the amount of debt on corporate balance sheets increased modestly from 27.6% to 28.2% of total invested capital. Consumer goods manufacturers and utilities were the most aggressive borrowers, while technology companies were the most debt-averse.

A closer look at the data suggests a tale of two economies, with industrial goods manufacturers adopting a considerably more conservative financing posture during the year while health care companies and service providers increased their reliance on debt.

While corporate balance sheets have not received much attention in the financial press recently, this analysis suggests that industrial goods manufacturers may have been girding for a recession throughout 2007. As financing costs for even the most credit-worthy borrowers increase, Mercer Capital will keep a close eye on the strategies that small and mid-sized companies adopt to cope with the continuing fallout.

For more information, contact Travis W. Harms, CFA, CPA/ABV (, Senior Vice President or Barbara Walters Price (, Senior Vice President at 901.685.2120.

Mercer Capital Management, Inc. is an employee-owned business valuation and investment banking firm serving a national and international clientele for over 25 years.

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Mercer Capital Management, Inc.
Matthew Washburn

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