Jesica, a lot of good investors made money shorting stocks in the last 3 years.
>>August 13, 2002
NEW YORK – U.S. corporations set a record for bankruptcies this year after US Airways Group Inc. sought protection from its creditors Sunday.
Assets of publicly traded companies filing for bankruptcy have reached $267.6 billion this year, according to BankruptcyData.com, as accounting scandals and crippling debt toppled some of America's biggest firms.
Assets in bankruptcy year-to-date have now surpassed the previous record, of $258.6 billion for all of last year, BankruptcyData.com said.
Three of the 10 largest bankruptcies ever came this year. Phone giant WorldCom Inc., with $103.9 billion in assets when it filed last month, was the largest bankruptcy ever, smashing the record set last year by energy trader Enron Corp., which had $63.3 billion in assets.
Telecommunications firm Global Crossing Ltd. and discount chain Kmart Corp., which both filed for protection in January, were also among the top 10.
"Firms loaded up on debt in the boom years of the late 1990s and into 2000," said David Hamilton, head of default research for rating agency Moody's Investors Service. "The fact that we're seeing so many defaults and bankruptcies is just a sign we are still working through that debt binge."
DEBT TOPPLES INDUSTRY GIANTS
Analysts had expected a large number of defaults and bankruptcies last year because many marginal companies loaded up on junk bonds when that market overheated in the late 1990s.
The recent wave of bankruptcies, though, has been dominated by former investment-grade companies that were able to sell bonds long after the junk bond market retrenched.
WorldCom, Enron, and cable providers Adelphia Communications Corp. and NTL Inc., all among the 10 largest bankruptcies ever, had investment-grade ratings for at least a year before defaulting, according to Moody's.
Bankruptcy filings by former industry giants are having ripple effects throughout the corporate bond market. Appetite for risk has dropped so far that investors are demanding record yield premiums for the risk of holding corporate bonds.
Corporate bond yield margins over safe Treasuries hit 2.37 percentage points Monday, the highest level ever, according to Merrill Lynch & Co.
With the investment-grade bond market now less willing to finance a swathe of troubled sectors, more companies are in danger of running out of cash, analysts said.
TELECOMS DEBACLE CLAIMS 22 COMPANIES
Companies involved in telecoms, cable television and technology, sectors where easy money allowed expansion to overshoot demand, are at greatest risk, Hamilton said.
"The industry is going to have to go through a period of consolidation, and I don't think they're quite there yet," he said.
Twenty-two of this year's 129 publicly traded companies filing for bankruptcy, with about $203 billion of assets, were in the telecoms sector, according to BankruptcyData.com. Of the 10 largest bankruptcies this year, only US Airways and Kmart were not related to telecoms, the firm said.
US Airways, the nation's sixth-largest airline, was the first major domestic carrier to seek bankruptcy protection since the Sept. 11 attacks triggered a financial crisis in an industry that already had been wracked by recession.
Based in Troy, Michigan, discounter Kmart filed for bankruptcy in January amid slumping sales and unsuccessful marketing initiatives.
At the beginning of the year, low interest rates and a recovering economy seemed to be setting the stage for improving credit quality, but corporate accounting scandals, terrorism threats and a slowing economic recovery have pushed back forecasts for any broad improvement, Hamilton said.
In one sign of the grim outlook, Moody's expects the junk bond default rate to begin climbing again next year. The rate fell to 10.3 percent in June from its recent peak of 10.7 percent in January, and will likely decline to 8.8 percent by year-end, Hamilton said. How much it climbs from there depends on whether the economy sinks into a second recession, he said.
"It seems to me at this point we're on the razor's edge as to whether that happens or not," he said. "With credit quality continuing to be weak, it's not an insignificant risk."
The default rate is based on the number of issuers defaulting. The record was 13.1 percent in July 1991, according to Moody's. |
