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Going, Going, Gone

Lehman's bankruptcy could be the tip of an iceberg of big-company Chapter 11 filings.
Alix Stuart, CFO Magazine
November 1, 2008

If every week brings a new chapter in the financial crisis, then we appear to be up to Chapter 11, and it may take a while to slog through. The $639 billion Lehman Brothers bankruptcy filing in September — the largest bankruptcy on record, as measured by value of assets — is likely to kick off a spate of other big-company bankruptcies, says Bain & Co. The consulting firm's experts expect at least 100 large (more than $100 million in assets) companies to go under in 2009 — 10 times the number in 2007.

"You've seen this wave of crisis across the financial sector, and there's a lot more to come," says Sam Rovit, head of Bain's Corporate Renewal Group. While consumer-sensitive industries like retail, restaurants, and airlines have already begun to feel the pain, none will be immune, he says.

Bain's prediction is based on a projected 5-to-10-fold increase in the number of speculative-grade debt defaults over the next two years (see the chart at the end of this story); in the majority of cases, such defaults lead to a bankruptcy filing within three months. Bain's figure is higher than similar projections by credit-rating agencies, but Rovit says he may even revise upward if the economy continues its current course.

Bankruptcy filings among small companies are already proliferating. Through June, such filings totaled 33,822, up 41.6 percent from a year earlier, according to the Administrative Office of the U.S. Courts.

The weakening economy and consumer demand certainly factor in, but the ongoing credit crunch and high levels of outstanding corporate debt are adding substantial fuel to the fire. "A company could be operating fine, paying its debt and making a nice profit, but if it has a big bank loan or bond issue maturing," it may be forced to file Chapter 11 simply to refinance, says William Lenhart, a partner at BDO Consulting, a division of BDO Seidman.

What can CFOs do? Experts recommend slashing costs and restructuring the balance sheet at the very first sign of difficulty, such as a decline in revenues or margins, or any indication that cash flows might not cover interest payments. Sounds simple, but "too many CFOs and boards of directors are in denial," says Rovit. "If you wait until you see signs of insolvency, it's too late."


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