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Insight: New bankruptcy ripples may emerge

American Airlines flight attendant Stewart walks down from the rear exit of an American Airlines Boeing 737 at DFW International Airport in
American Airlines flight attendant Stewart walks down from the rear exit of an American Airlines Boeing 737 at DFW International Airport in

By Tom Hals, Sue Zeidler and Caroline Humer

(Reuters) - Three years after the collapse of Lehman Brothers touched off a tidal wave of bankruptcy filings, corporate failures may be about to pick up again, with some big-name companies among those struggling for survival.

Companies in a range of businesses, including hair salons, restaurants, renewable energy, and the paper industry, have tumbled into Chapter 11 in the past few months.

The weak economy, lackluster consumer spending, a shaky junk-bond market and increasingly tight lending practices are also threatening struggling companies in industries as diverse as shipping, tourism, media, energy and real estate.

AMR Corp's American Airlines may need to go to court to restructure its labor contracts, though a spokesman for the airline reiterated on Monday that bankruptcy is not the company's goal or preference.

Kodak confirmed that a law firm known for taking companies through bankruptcy has been advising on strategy as attempts to overcome the loss of its traditional photography business falter. It has denied any intention of filing for bankruptcy.

Some bankruptcy and restructuring experts warn a fresh U.S. recession could trigger a string of failures to rival the one that followed Lehman Brothers, which in 2008 filed the biggest bankruptcy in U.S. history.

"It's getting busier for everyone I know," said Jay Goffman, global head of the Corporate Restructuring Group at law firm Skadden Arps, Slate, Meagher & Flom. "I think 2012 will be a busy year and 2013 and 2014 will be extraordinarily busy years in restructuring."

No one is currently predicting a second Lehman-type collapse. Its $639 billion bankruptcy came after a loss of confidence in the investment bank as asset values plummeted, leading to the drying up of credit lines.

In fact, predicting a bankruptcy wave at all is a tricky task, experts say. It could depend on several unknowns: how much money banks and other institutions are willing to lend troubled companies, whether the economy lands in a double-dip recession and what happens in the European debt crisis.

The sovereign debt crisis in Europe could be the most important X factor. Even the experts who say that a bankruptcy crisis is not coming because current low interest rates make it easy for companies to get cash to finance their way out of trouble, say that the euro zone's problems could trigger defaults here.

"It is possible that one or two sovereign debt defaults would increase the pressure we'd feel in the U.S. credit market. Then we might see an environment like we had in 2008," said Peter Fitzsimmons, president for North America for turnaround advisory firm AlixPartners LLP.

MORE FILINGS

Chapter 11 filings are picking up, bankruptcy data show. Ten companies with at least $100 million in assets filed for bankruptcy in September, the most since 17 filed in April, which was the busiest month since 2009, according to Bankruptcydata.com.

For a graphic click here http://link.reuters.com/nuw34sp:

Recent failures included renewable energy companies Evergreen Solar and Solyndra. The latter collapsed in a politically-charged bankruptcy after taking a $535 million loan from the federal government.

Other recent bankruptcies include glossy magazine paper manufacturer NewPage Corp, which was the largest bankruptcy of the year and the largest non-financial company filing since 2009; Graceway Pharmaceuticals, which makes skin creams; Hussey Copper Corp., which makes the copper bars used in switchboards, and the Dallas Stars of the National Hockey League.

So far this month, five companies with more than $100 million in assets have filed, including the Friendly's ice cream chain - and wireless broadband company Open Range Communications Inc.

It is difficult to predict trends in filings. For example, experts who focused on macroeconomic credit indicators and default projections in 2006 or 2007 wouldn't in many cases have been prepared for the severity of failures that followed.

In 2009, General Motors, Chrysler Group, LyondellBasell Industries and General Growth Properties all filed for bankruptcy, contributing to a record number of filings and topped the list of largest bankruptcies ever.

At the same time, some experts were predicting an even deeper and longer list of corporate collapses. But within a year of bankruptcy filings breaking records, banks and other financial institutions were buying debt and lending, making it easy for companies to finance their way out of trouble.

Two months after Lehman failed, the U.S. Federal Reserve slashed rates to near zero. Once confidence began to return to the debt markets, investors flocked to high-yield bonds sold by ailing companies, allowing them to refinance.

Other failing companies were able to "amend and extend" - or to critics, "amend and pretend" - by striking new borrowing terms with lenders that delayed debt maturities in the hopes the economy would rebound smartly and business would pick up.

Those measures often avoided operational overhauls, creating what some experts called "zombie companies" that cut staff and prices to survive, but were too sick to invest in new projects.

Bankruptcy court allows troubled companies to shed debt and also become more operationally efficient as they renegotiate labor contracts, as airlines have done, or reject pricey store leases, which retailers often do.

But these changes do not always work, especially when companies find little support among suppliers or creditors for their turnaround plans. Bankrupt book chain Borders, for instance, recently closed its doors after failing to find a buyer.

In addition, confidence in the economy and easy access to debt allowed companies to complete restructurings in 2009 and 2010 with business plans and debt loads that were based on an economic pickup that has now faltered. That could create the potential for trouble at companies that have already restructured once.

SIGNS OF TROUBLE

Restructuring advisers agree that a dimming economic outlook will force lenders to make some tough calls about troubled companies. Those who see a broader wave of bankruptcies expect the economy to dip back into recession as the U.S. government cuts spending and Europe's debt problems worsen.

They also look beyond the equity market for less visible signs of trouble. They see a junk-bond market that has suffered its worst sell-off since the Fed cut rates to near zero in 2008 and falling loan market prices as lenders reduce their exposure to weak borrowers.

There are even troubling signs coming from otherwise sanguine rating agencies that assess corporate debt. Moody's noted that the number of downgraded liquidity ratings for troubled companies rose for a third straight month in September, an ominous sign that was similar to the third quarter of 2007 when the economy last slid into recession.

Indeed, one analyst said the Evergreen Solar bankruptcy as well as the recent filing of restaurant operator Real Mex Restaurants Inc show that weak companies are finding it hard to borrow. Both failed to reach the kind of refinancing deal with creditors that until recently was saving many troubled companies from Chapter 11.

"The idea that a couple of companies can't even go to existing lenders for a real lifeline is quite telling right now," said Kevin Starke, an analyst with CRT Capital Group, a brokerage that specializes in distressed securities.

LACK OF HOME RUNS

Still, not everyone is convinced more bankruptcies are on the way. Jim Hogan, the head of GE Capital's restructuring finance unit who works with a lot of medium-sized companies, said he expects only a gradual increase in business, limited to the weakest industries.

"I'm not telling anyone internally I'm expecting some big home runs for us," Hogan said.

Some said the current rise in bankruptcy filings is routine as fatigued lenders pull the plug on deadbeat companies. While debt and equity markets may have recently been in a swoon, many credit indicators generally show Corporate America to be in decent health.

For example, corporate balance sheets are stuffed with cash, and the rate of corporate loan defaults is expected to end the year at 0.23 percent, well below the historical average of 3.57 percent, according to Standard & Poors.

One of the biggest concerns of recent years, a looming "wall of maturities" of bonds that come due in the next few years, has largely been refinanced, according to Moody's.

Despite this, the level of debt held by consumers, the federal government and the corporate sector weighs heavily on the economy and will likely spell trouble for some major companies.

"You have this huge overhang of debt. You don't see a significant amount of improvement in the economy. How long can that continue?," said Jay Indyke, chair of the bankruptcy and restructuring practice at law firm Cooley LLP.

(This story corrects Jay Goffman's title in paragraph 7 to head of restructuring, from co-head)

(Reporting by Tom Hals in Wilmington, Delaware, Susan Zeidler in Los Angeles, Caroline Humer in New York; Additional reporting by Nick Brown in New York; Editing by Martha Graybow and Martin Howell)

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