>>When Consolidated Freightways announced its bankruptcy filing on Labor Day, it surprised 15,500 workers. This was no startup, after all. The country's third-largest trucking company had been around for 73 years and had annual revenues of $2.2 billion.
An even bigger surprise is how many other companies are in danger of being toppled by the same forces that claimed Consolidated: big debts and an anemic economy.
Dozens of publicly traded Northwest firms, from Amazon.com to Western Wireless, joined the borrowing boom of the late 1990s that sent corporate debt to a record high.
Now, as the economy refuses to recover, many companies are losing money and having trouble paying their loans. At the same time, the erratic stock market has shut off, for now, access to new capital.
If the economy and the market don't improve, "we're in for a tough three years because of the debt load," said Michael Gocke, a partner at accounting firm Moss-Adams in Seattle. "I wouldn't be surprised to see other companies fail."
More failures could ripple through the economy, further cutting jobs and delaying recovery.
Consider Emeritus Corp. The little-known Seattle company employs more than 4,000 workers across the country to care for some 10,000 elderly people in retirement homes.
During a spending spree in the 1990s, Emeritus assembled a group of 151 assisted-living centers — and ran up millions in debt. Now Emeritus is selling property to raise cash to operate and pay its debt.
"We recognize it's been a tough few years," said Raymond Brandstrom, chief financial officer. "Would we have liked to have $100 million in the bank? You bet. Wouldn't everybody?"
Tough times
Debt acts as a financial turbocharger in an expanding economy, speeding a company's growth. Since 1995, corporate borrowing has soared 80 percent to a record $4.9 trillion — nearly half the nation's annual economic output.
But when sales or profits slump in a recession, debt can quickly become destructive.
Several Northwest companies, including Emeritus, are facing insolvency, in which the fair market value of their liabilities exceeds that of their assets. To survive, they are slashing staff, selling chunks of their businesses and wringing extensions on their loans. "This is significantly more difficult than at any time in the last 25 years," William Repko, a banker at J.P. Morgan in New York, said of the current financial climate. "The mood is extremely ugly, the crisis of confidence is real, and there is an appropriate willingness to question everything."
Even profitable Northwest companies are having debt problems. Fisher Communications said last month it will sell a string of properties on Lake Union and two television stations in Georgia to raise cash to pay down debt. One sign of how much Fisher needs money: It is willing to sell the two TV stations at a loss.
The trouble stems in part from the Fisher Plaza high-tech hub near the Space Needle. The $130 million complex was built to serve Internet companies and broadcasters but opened just as the tech boom was busting, straining Fisher's finances. Then the economy slowed and advertising plummeted.
Fisher defaulted on some of its agreements with creditors last December and obtained new financing this year, but it remains under pressure. In the first half it lost $4.2 million.
"The (advertising) market isn't bouncing back as quickly as we'd hoped," said Christopher Wheeler, Fisher's spokesman. "I don't want to speculate on whether we've turned the corner."
Trying to turn around
Other companies bit off more than they could chew during the boom. PSC, a Portland-based maker of bar-code scanners, spent $61 million to buy a rival in January 2000. Then the stock market and economy turned south.
"We bought this company, we paid cash and it was obvious that we couldn't afford the debt load," said chief executive Edward Borey, who was brought in later to turn PSC around.
Founded in 1969, PSC supplies a third of the scanners used at retail checkout stands in the U.S. But when a deal to sell itself to a bigger company fell through in 2000, Borey said, "the house of cards came tumbling down."
Since then, Borey has sold several million dollars worth of assets, laid off 600 people — 40 percent of the company — and hired an investment bank to find investors who can shore up the company's financial foundation.
Bankers will keep extending the loans month by month "as long as we continue to make progress in our restructuring," Borey said. "I feel very comfortable about that."
All of PSC's $120 million debt is due Oct. 1, and its losses have raised "substantial doubts about its ability to continue as a going concern," PSC said in its second-quarter earnings report.
High debt, high risk
Troubled companies have at least one factor on their side: inertia. Bankers are reluctant to call in the debts of ailing firms, since doing so often means losing their money in bankruptcy court instead of getting repaid with interest.
"Lenders have an incentive to work with companies that they think have a reasonable chance of working through their problems," said Kelly Snow, a partner at accounting firm Deloitte and Touche in Seattle. "If lenders force a company into bankruptcy, they often get pennies on the dollar."
But as the downturn wears on and companies falter, they often violate covenants in their loans, which can require bankers to call in the credits or renegotiate. With bankruptcies at record levels, some bankers are refusing to lend to particular sectors or to smaller companies, even if they're profitable.
"The more little strikes a company has against it, the tougher the lenders are," even if the company is a good customer, said John Steel, an attorney who works with public companies at Gray Cary Ware & Freidenrich in Seattle.
Some companies are fortunate in not having bank loans. Amazon.com, for example, raised much of its $2.2 billion debt by selling bonds. Since bondholders can't redeem except under unusual circumstances, the e-tailer is protected from banker angst.
Amazon.com also has $800 million in cash on hand. But it, too, could be facing insolvency, according to accountants, if the market value of its liabilities exceeds its assets. Spokesman Bill Curry bristles at this characterization. "We are fully able to pay our bills," he said.
Amazon.com also remains unprofitable, despite occasional positive quarters. One plus: Some of Amazon.com's bonds don't require any payments for the first five years. That grace period gives it more time to reach profitability.
Although some analysts have argued it may never generate enough money to pay off its debt, investors have been buying the bonds recently, a signal they see prospects brightening. Yields, which fall as prices rise, dropped to about 10 percent from 22 percent a year ago, according to Andrew Ebersol, a debt analyst at KDP Investment Advisors in Montpelier, Vt.
While such a yield suggests the company is "anything but a distressed," he said, "it's still a high-yield (or junk) credit," reflecting substantial risk to investors.
Survivors?
Some companies have used the stock market to pull out of imminent danger. Hollywood Entertainment, the Portland-based chain of 1,800 video stores, was facing insolvency until March, when it sold newly minted stock to investors at $15 a share. But stock-market turmoil has closed that option for many.
Buyouts, too, can bring salvation. Electric Lightwave, a Vancouver, Wash.-based telecom firm, spent $700 million over the years building a fiber-optic network in the West. It was paying $100 million a year to service its debt when it was bought out by Citizens Communication of Stamford, Conn. The acquisition, completed in July, ups the odds of survival.
"It worked out as a positive solution for us," said Chris Heavens, general manager. "A trouble shared is a trouble halved."
In some cases, it isn't a disaster for debts to exceed capital. That's how many start-ups get going. Western Wireless, the Bellevue-based cell-phone company, has $2.4 billion in debt; liabilities exceed assets by about $400 million.
Western Wireless appears to be safe, even though losses more than tripled to $126 million from $37 million a year ago, largely because of a deferred tax charge. The company says it has $400 million in untapped borrowing, and it expects the business to generate enough cash to cover payments.
"We have sufficient liquidity and always made sure we had sufficient liquidity since we started the business," said chief executive John Stanton.
Over leveraged
Interest rates at 40-year lows may not be enough for Emeritus. It has lost money every year since it was founded in 1993 and has been facing insolvency — with liabilities exceeding assets — since 1998.
In theory, retirement homes were supposed to be money spinners as baby boomers grew old. But providing room, board and medical care for seniors on fixed incomes wasn't a bonanza.
Emeritus spent the $130 million it raised with stock and debt offerings and ran up $151 million in debt. Last year, auditors warned Emeritus it faced collapse unless it refinanced its loans. It did, putting off big payments until 2003, when $62 million is due. But it is paying 3.5 percentage points above the prime rate, a level typical of troubled borrowers and enough to wipe out Emeritus' profits.
Emeritus is edging closer to making money. Since it stopped buying retirement homes, losses have declined and cash from operations has increased.
But Emeritus is barely breaking even. And it has only $10 million in the bank. So to make payments, it is selling properties, sometimes through complex deals involving its own executives that have created potential conflicts of interest and kept losses and debts off the books, according to the company's financial filings.
Other headaches are cropping up, too. The American Stock Exchange recently warned it may stop listing Emeritus. Analysts are giving the stock the cold shoulder — after calling it a "buy" during its spiral from $15 in 1995 to $1.45 last year. (The stock closed at $1.75 Friday.)
Emeritus' CFO, Brandstrom, said the company wasn't in violation of any of its loan agreements. "You can read the (financial) statements and interpret them any way you wish," he said. "We see things getting better."
But there's one paragraph investors ought to read — one that's showing up in more financial footnotes these days: "In the past, we have been unable to generate sufficient cash flow from operations to cover required interest, principal and lease payments," Emeritus said in an earnings report this year, "and we may be unable to do so in the future."
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