North Georgia business bankruptcy filings surge
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By MARGARET NEWKIRK / The Atlanta Journal-Constitution / Oct 26, 2008
ajc.com
The popped housing bubble and crushed credit market have pushed record numbers of North Georgia businesses into bankruptcy court this year.
Chapter 11 filings are up between 50 percent and 70 percent over all of last year, depending on how they’re counted.
They’re also up significantly from any of the past 20 years — and there are almost 10 weeks left in 2008.
As of Friday, 283 companies and their affiliates had filed for Chapter 11 protection from creditors in Georgia’s Northern District, which has offices in Atlanta, Gainesville, Newnan and Rome.
Jeffrey Kelley, head of the bankruptcy practice at the Troutman Sanders law firm, said the surge is the biggest he remembers. “This is higher than I’ve seen, and I’ve been doing this since 1975,” Kelley said.
The list of 2008 Chapter 11 cases includes a number of related filings. But even without those included, it dwarfs previous years. Last year, 161 companies and affiliates filed for Chapter 11 protection.
The worst year before was in 2002, when 185 companies filed amid the economic aftermath of the World Trade Center attacks.
A Chapter 11 filing doesn’t mean a company is out of business. It gives the company a chance to renegotiate debts under a judge’s supervision. Sometimes it works and the company emerges intact; sometimes it doesn’t.
Companies filing for Chapter 11 protection this year will also have a harder time emerging from it than in previous years, Kelley said. So-called debtor-in-possession financing, often a key to a restructuring, will be harder to find.
“That’s part of the credit crunch,” Kelley said.
Without DIP financing, many companies in Chapter 11 will have to shut down and sell their assets to pay creditors, Kelley said. Or they’ll convert to Chapter 7 bankruptcy and liquidate that way.
Not surprisingly, the roster of North Georgia bankruptcies is dominated by companies connected to the housing industry’s collapse.
Construction contractors, builders and developers are numerous. So are the grading companies, sod layers, lumber and lumber product companies and roofers who worked for and supplied them.
“It destroyed us,” John Ellis of Cherokee Roofing and Construction in Acworth said of the housing collapse.
“We had several big clients go under,” leaving the company with huge uncollectible bills, he said.
The crisis “trickled from the general contractor to the subs,” he said. “Nobody would pay their bills.”
Cherokee is among 20 companies that filed for Chapter 7 bankruptcy in September and October, including four large Atlanta home builders.
Even firms with no direct connection to housing got hit by troubles in the credit market.
They include Catalyst Energy, a gas marketer now being sold to a competitor after filing for Chapter 11 protection Oct. 1.
The fallout from September’s collapse by Lehman Brothers cost Catalyst a critical line of credit.
Developers of commercial properties got hit, too.
The credit crunch pushed the developer of a planned 800,000-square-foot retail development near Peachtree City into an involuntary Chapter 11 on Oct. 6, for instance.
Scott Seymour of Fischer Crossings Development Group said his lenders included Integrity Bank in Alpharetta, which failed in August.
Another major lender required payment in full. And it was impossible to find replacement financing before a creditor, an excavation company, filed the involuntary petition against Fischer, Seymour said.
“I feel like the local banks really started to stop lending in June of this year,” Seymour said. “Right now, it’s virtually impossible to get a loan.”
Seymour blamed recent reclassifications of all real estate loans by the Federal Deposit Insurance Corp. for drying up financing from smaller regional banks.
The credit markets are loosening some now.
But the worst may not be over in bankruptcy court, given other bad news in the economy.
Troutman Sanders’ Kelley predicts coming problems, for instance, for commercial developments built “30, 40, 50 miles from downtown Atlanta” in anticipation of houses that aren’t being built.
“We haven’t seen the entire effect of the shakeout,” he said.
Jack Williams, a Georgia State University professor and resident scholar at the American Bankruptcy Institute, also sees more bankruptcies coming. “Bankruptcy is a lagging economic indicator,” Williams said. Filings spike “two to three quarters after the economy hits a rough spot.”
October’s numbers are a bad sign, he said, because the fourth quarter is not normally a time when businesses file for bankruptcy. Retailers in particular try to hang on if they can to reap holiday sales, he said.
“If the Christmas season isn’t a humdinger, we’ll have a financial bloodbath in January,” Williams said. |
