The September 11th attack
Wave of bankruptcies can't be blamed just on terrorism
By Jeff St.Onge
Bloomberg News Service
WILMINGTON, Del. — Net2000 Communications Inc. had teetered toward insolvency before Sept. 11. The terrorist attacks that jolted the economy made bankruptcy inevitable for the phone and Internet service provider, said Clayton Thomas of the business he heads.
"I have been in the front car of a roller coaster," he said. "September 11 changed everything. All bets were off."
Thomas' decision to seek bankruptcy protection for his Herndon, Va.-based company is one that has confronted hundreds of executives dealing with mounting debt and declining sales. A record 224 publicly traded companies with more than $180 billion in assets filed for bankruptcy this year, 27 percent more than last year's record 176, says BankruptcyData.com, a Boston- based Web site that tracks such filings.
The collapse of unprofitable Internet businesses, a faltering economy after an unprecedented decade of expansion, overconfidence and over-expansion contributed to the carnage. Since hitting a peak of 5048 on March 10 last year, the Nasdaq has plunged 63 percent.
The bankruptcy victims include such brands as AMF Bowling balls, Polaroid cameras, Converse sneakers, Schwinn bicycles, Vlasic pickles, Coleman camping supplies and Sunbeam appliances. Companies that depend on travel and tourism, including the parent of American Hawaii Cruises, and Alamo Rent-A-Car and National Car Rental, have been particularly hard hit.
Earlier this month, Greensboro, N.C.-based Burlington Industries Inc., once the world's largest textile maker, became the 38th company with more than $1 billion in assets to seek Chapter 11 protection this year. That's almost double the previous record of 21 set last year.
The booming 1990s inflated share prices, letting companies accumulate debt with junk bonds and big bank loans. Sliding share prices and increased debt means a "double whammy" now, said Henry Miller, vice chairman and head of restructuring at Dresdner Kleinwort Wasserstein, an investment banking firm. "We're paying the piper for an over-optimistic view of future performance."
A multibillion-dollar Chapter 11 filing affects thousands of people, including employees, customers, suppliers, investors and other creditors. The effects can spill over into healthy businesses, says Bill Brandt, president of Chicago-based turnaround firm Development Specialists Inc.
Still, bankruptcies give companies the chance to change strategies and fix mistakes. The court-supervised process can take years to complete, and sometimes leads to liquidation.
TWA spent the better part of a decade in bankruptcy before AMR Corp.'s American Airlines bought it out of its third Chapter 11 in January for $4.2 billion.
Travel and tourism
Businesses that rely on travel and tourism have suffered particularly since the Sept. 11 attacks.
Two cruise lines — American Classic Voyages and Renaissance Cruises — the VecTour Inc. bus line, Las Vegas's Aladdin casino, Planet Hollywood International Inc. and several other restaurant chains have filed for bankruptcy. Midway Airlines Corp., which had filed for reorganization in August, stopped operating Sept. 12.
Bankruptcies were on the rise well before Sept. 11. Flocks of telecommunications and Internet start-ups, movie theater chains, retailers, chemical companies and textile and apparel manufacturers opted for Chapter 11 earlier this year.
The largest movie theater chains, including Regal Cinemas Inc. and Loews Cineplex Entertainment Corp., were mired in red ink after new "multiplex" theaters led to an oversupply of screens.
Bethlehem Steel Corp. joined LTV Corp. and more than a dozen other steelmakers in bankruptcy court due to competition from low- priced imported steel.
In April, California's largest utility, Pacific Gas & Electric, became the third largest bankruptcy case ever behind Texaco Inc. in 1987 and Financial Corp. of America in 1988. The utility lost more than $9 billion paying more for power than it could bill customers under the state's flawed deregulation scheme.
'Banks terrified'
U.S. corporations are more likely to file for bankruptcy today because the stigma has faded, said Chuck Tatelbaum, a Naples, Fla., attorney. The advantages include escaping from unprofitable leases and onerous union contracts, he said.
"Filing for bankruptcy is now looked upon as a business strategy rather than an admission of failure," said Tatelbaum, former vice president for research at the American Bankruptcy Institute.
Lax lending standards and an overheated junk-bond market in the late 1990s allowed companies to borrow with ease.
"These days banks are terrified," Miller said. "As the value of collateral deteriorates, it becomes harder to get rescue loans."
Internet and telecommunications companies such as Net2000 comprise the largest group seeking bankruptcy help. Net2000, founded in 1993, went public on March 7, 2000, and traded as high as $40. It last traded at 20 cents.
"The market simply overestimated how much the world needed telecom services," said Frank Savage, co-head of restructuring at Lazard Freres & Co.
Among the dozens that chose the sanctuary of Chapter 11 are At Home Corp., 360networks Inc., Covad Communications Group Inc., NorthPoint Communications Group Inc., PSINet Inc., Teligent Inc. and WinStar Communications Inc.
