Bankruptcies On The Rise...
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dailynews.yahoo.com
Friday March 9 3:10 PM ET
Big Bankruptcies Surge; More May Come
By Dena Aubin
NEW YORK (Reuters) - A downward spiral in U.S. corporate credit quality
triggered a massive number of large bankruptcies last year, and the trend
may be far from over, bankruptcy professionals say.
Business failures by companies with $1 billion or more in assets reached
their highest level in two decades last year, according to
BankruptcyData.com. Some 21 such companies filed for bankruptcy last
year, the research service said.
It's the most such ``mega-filings'' since the current federal bankruptcy code
went into effect in 1979, according to the American Bankruptcy Institute.
More troubles could lie ahead, as a slowing economy puts more companies in harm's way. Tightening credit
by nervous lenders could even hurt prospects for economic growth, economists say.
Already this year, major bankruptcies have included Trans World Airlines Inc. (TWAIQ.OB), Sunbeam
Corp. (SOCNQ.OB), Loews Cineplex Entertainment Corp. (NYSE:LCP - news) and Finova Group Inc.
(NYSE:FNV - news).
Drowning In Debt
The business busts are tied to a number of causes, but the a crippling mix of heavy debt and over-expansion
were often to blame.
A period of easy credit in the late 1990s, including an overheated junk bond market, is one reason for the
flood of bankruptcies, said James Spiotto, a partner and corporate default specialist with Chapman and
Cutler, a Chicago law firm. The same thing happened in the early 1990s, when a wave of large bankruptcies
followed a heyday of junk bond issuance.
Because junk bond issuance surged in 1998 and 1999, the current flood of bankruptcies isn't surprising, said
Spiotto. ''In fact, we would expect that pattern to continue,'' he said.
Companies that took on debt to fuel expansion ran into trouble when banks began tightening lending
standards last year. Debt and equity investors that had lavished money on New Economy companies have
bolted since the Nasdaq Composite index has tumbled around 60 percent from its all-time high a year ago.
The resulting cash crunch hit telecommunications upstarts particularly hard. ICG Communications Inc.
(ICGXQ.PK), an Internet service provider, and GST Telecommuncations Inc. (GSTXQ.OB), a satellite
telecom provider, both filed for bankruptcy protection.
More recently, heavy debt sank Internet retailer eToys Inc. (NasdaqNM:ETYS - news), which filed for
bankruptcy protection Wednesday.
Expansion plans also went awry in the movie theater sector, which saw at least 10 bankruptcies last year.
The theaters ran into trouble after building too many new multiplexes for the market without closing older
theaters.
From Safe Havens To Junk
Some of last year's bankruptcies were unpredictable.
Asbestos injury lawsuits toppled former blue-chip Owens Corning (NYSE:OWC - news), the Toledo, Ohio
maker of Pink Panther Fiberglas insulation, and Armstrong World Industries Inc., the Lancaster, Pa.-based
operating unit of Armstrong Holdings Inc. (NYSE:ACK - news).
Accounting irregularities sparked troubles at Safety-Kleen Corp. (NYSE:SK - news), a South Carolina
hazardous waste firm that filed for bankruptcy last June.
Competition from overseas sent shivers through the steel industry, ending in bankruptcy for
Wheeling-Pittsburgh Corp. (NYSE:WHX - news) and LTV Corp. (LTVCQ.OB)
The sheer number of large bankruptcies was a big factor in the poor performance of the corporate bond
market last year, as the wreckage among America's household names spooked investors.
``We had so many investment-grade companies driven to low ratings or Chapter 11 by unexpected,
out-of-the blue events,'' said John Lonski, chief economist for Moody's Investors Service. ``That has
compelled investors to approach investment-grade credits more cautiously.
In one barometer of investors' caution, the gap between yields of corporate bonds and safe Treasuries has
widened to about 2.30 percentage points for long-term investment-grade bonds, up from a 1.06 percentage
point average over the last 15 years, according to Moody's.
And Faster Defaults
This wave of bankruptcies is different in one respect from other boom-and-bust cycles, said Spiotto of
Chapman & Cutler. Troubled companies in the past had inefficiencies that could be cured, but many of the
recent failures won't be able to generate positive cash flow, even if they restructure their debts, he said.
``We have forgotten in this latest period here that cash is king, and without a constant flow of revenues of a
positive nature, you're going to have problems,'' said Spiotto.
Two interest rate cuts by the Federal Reserve (news - web sites) in January haven't yet eased the credit
crunch for many companies, according to CreditSights.com, a fixed-income research service.
``There is no sign yet that banks are more willing to lend to any credits with the slightest bit of hair on
them,'' the research service said in a report this week.
In another ominous sign, Moody's has projected that defaults among speculative-grade companies will
approach 11 percent within a year, from an already high 6.6 percent now.
Defaults are not only increasing, but are also happening faster after bonds are issued, said Edward Altman,
Max L. Heine professor of finance at New York University's Leonard N. Stern School of Business and an
expert on defaults.
``There was very easy credit and sloppy underwriting standards in the late 1990s, which has resulted in a fair
number of defaults,'' he said.
Ripple effects from the large bankruptcies are likely to be felt in the U.S. economy in years ahead, said
Moody's chief economist Lonski.
``Lenders are proceeding more cautiously, and to the degree that marginal creditors are denied funds, we're
not going to see the explosive economic growth we had in 1999 and 2000,'' he said.
Jim |
