Bankruptcies still piling up
By Jeff St. Onge
Bloomberg News Service
WASHINGTON — U.S. corporate bankruptcies are headed for a second straight record year after filings by Adelphia Communications Corp., Global Crossing Ltd. and Kmart Corp.
Last year, 255 publicly traded companies, led by Enron Corp., put $260 billion of assets under court protection, almost triple the record that stood for a decade. So far this year, 113 companies with $149.3 billion in assets have filed. WorldCom Inc., with $103.8 billion, may seek Chapter 11 protection after acknowledging it hid expenses to boost profits.
The recovering economy hasn't been enough to stem a bankruptcy trend fueled by corporate scandals and the collapse of last decade's speculative bubble. Reckless optimism created excess capacity in industries such as telecommunications, experts said.
"The worst isn't over by any means," said Ken Buckfire of the investment banking firm Miller, Buckfire Lewis & Co. "I don't see any decrease in the volume of bankruptcies for the next year-and-a-half to two years."
Enron, with $63.4 billion in assets, filed the largest Chapter 11 case in December. It would be dwarfed if WorldCom declares bankruptcy. The long-distance telephone company said it's trying to work out a plan with banks to avoid Chapter 11.
"I've never seen the magnitude and the concentration of financial failures in such a short period of time," said corporate lawyer David Heiman of Jones, Day, Reavis & Pogue, who has handled some of the biggest Chapter 11 restructurings. "There are some huge companies where the value has simply evaporated."
At the same time, the U.S. economy is recovering. Consumer spending, home sales and factory production are rising. Manufacturing expanded in June at the fastest pace in almost 2 1/2 years, according to an industry survey that also shows factories may be cutting fewer jobs.
"The economy may be headed for a comeback, but corporate bankruptcy filings are a lagging economic indicator," said Carter Pate, head of financial advisory services at PricewaterhouseCoopers.
"Enron's collapse in December, other high-profile bankruptcies like Kmart, and accounting issues have added to the uncertainty that began with the acceleration of the recession on Sept. 11," Pate said.
Last week, cable television company Adelphia Communications Corp. filed for Chapter 11. Days earlier, XO Communications Inc., with $8.5 billion in debt; and the largest U.S. farm cooperative, Farmland Industries Inc., filed for bankruptcy.
Five of the eight largest Chapter 11 cases in history have been filed since December: Enron; telecommunications company Global Crossing, with $25.5 billion in assets; Adelphia, with $24.4 billion; retailer Kmart, with $17 billion; and NTL Inc., Britain's biggest cable-TV operator, with $16.8 billion.
"There's an endless supply of situations and circumstances that give rise to financial failure," said Marc Abrams, a bankruptcy lawyer with New York's Willkie, Farr & Gallagher.
Kaiser Aluminum Corp., the second biggest U.S. aluminum company, was forced into bankruptcy in February by thousands of asbestos lawsuits. A month later, National Steel Corp. became one of 23 steelmakers going bankrupt in the past five years because of overseas competition.
Telecommunications companies such as Global Crossing and WorldCom have suffered because of a glut of capacity amid waning demand for telephone and Internet services.
Airlines, energy companies, retailers, metals companies and telecommunications providers are prime candidates for bankruptcy filings later this year, company advisers say.
Chapter 11 bankruptcy keeps the creditors of cash-strapped companies at bay while they restructure finances and negotiate a recovery plan, said Marcia Goldstein, a bankruptcy lawyer at Weil, Gotshal & Manges.
Because lenders are repaid ahead of other creditors, "Chapter 11 can also enhance a company's ability to get financing," she said. In bankruptcy court, a company can escape unfavorable contracts and expensive leases.
With more and larger businesses opting for bankruptcy, the stigma is also easier to overcome, Goldstein said.
While the debtor keeps control of the business and its assets in Chapter 11, the court-supervised recovery process can take years to complete and sometimes leads to liquidation.
A good gauge of how long the increase in corporate bankruptcy filings will last is the default rate on junk bonds, said Edward Altman, professor of finance at New York University's Stern School of Business. About three-fourths of the companies that default on bond debt wind up in bankruptcy, Altman said.
Based on the $40 billion of junk bonds that have defaulted this year, Altman predicts about a 12 percent default rate in 2002. That's compared with last year's record 9.8 percent rate, representing about $64 billion of debt.
Pate said regardless of the economic climate, more than 200 public companies will seek Chapter 11 protection from creditors this year.
"You have to separate the better economy from the number of company bankruptcies," said Peter Fitzsimmons of the consulting firm Alix Partners of Southfield, Mich. "A lot of debt still needs to be restructured."
