U.S. bankruptcies set record in 2002

By Matt Krantz
USA Today

Large companies are failing at a record pace this year, stoking fears that another wave of corporate wipeouts may hit in 2003.

The latest disaster came when soured loans and a bum acquisition caused insurance and finance company Conseco to become the third-largest company ever to file for bankruptcy protection. Counting Conseco, companies with $375.2 billion in assets have filed for bankruptcy protection this year, easily topping last year's record $258.5 billion, says Chris Stuttard, editor of BankruptcyData.com.

The spread of corporate Titanics often hurts employees and shareholders most as companies reorganize, slashing jobs and erasing investors' equity. The effects are bleeding into everyday life as Kmart closes stores, United Airlines weighs more layoffs and cuts in air service, communities see tax bases shrink and lenders get less than 20 cents back on every $1 of bad telecom loans.

"There's still a lot more pain to come," says Diane Vazza, head of global fixed income at Standard & Poor's.

The magnitude of the bankruptcies stuns credit watchers who thought the corporate climate would be better by now. What worries them:

• Eight of the top 12 U.S. bankruptcy cases among publicly traded firms have been filed in the past 13 months, starting with Enron last December, BankruptcyData.com says.
• Public companies are five times more likely to default than during the mid-1990s and twice as likely as during the 1991 recession, says Tim Kasta, managing director of Moody's KMV, part of Moody's Investors Service that uses computers to predict defaults. In other words: One of 20 companies will default in the next 12 months.
• Telecom and cable companies defaulted on a record $75.5 billion in debt this year, says Mariarosa Verde, senior director at Fitch Ratings. That's nearly three times last year's already high level. While many of the weakest telecom firms have crumbled, there are likely to be more defaults next year.
• A record number of highly rated companies, called investment grade, defaulted this year, including WorldCom and Genuity, Vazza says. This shows even investors who stuck with supposedly safe companies have suffered.

Still, investors shouldn't panic. While more large firms have failed, the number of companies filing for bankruptcy protection is down. This year, 175 publicly traded companies have filed for bankruptcy protection, down 32 percent from 2001 and flat with 2000, BankruptcyData.com says.

And while defaults were 3 1/2 times more common this year than average, things have improved dramatically since July, Verde says.

"Yes, it looks awful when another headline name files for bankruptcy," she says. "But things won't be as severe (next year) as they were in 2002."