Credit

Credit Review

The Bankruptcy Belt
Joseph McCaffertyJune 28, 2002

Amid signs the economy is coming out of the doldrums, there are still rough seas in some sectors. About 200 public companies are likely to file for bankruptcy by the end of 2002, according to “The Phoenix Forecast,” a recent report by PricewaterhouseCoopers. Although that’s fewer than the 257 public companies that filed for bankruptcy in 2001, it’s still historically high.

Most of the bankruptcies are concentrated in a few industries: telecommunications, automotive, computer hardware, metals (steel), chemicals, and retail. “It’s not time to get aggressive and extend new credit in these industries,” says Carter Pate, author of the report. “This year will continue to be tough for them.”

One of the biggest surprises, according to Pate, is that telecom is still one of the weakest industries. Many had expected the sector to recover by now, but Pate doesn’t see that happening until late this year or early next year. “The 2002 telecom bankruptcies will include some surprises,” he says. In April, Williams Communications Group Inc., a Tulsa-based network services provider, unexpectedly filed for bankruptcy. The company was considered more solid than its telecom peers.

Some industries on the list are already showing signs of life. Steel, for example, is beginning to rebound, helped by tariffs enacted earlier this year. “The industry dynamics have changed significantly since the start of the year,” says Mark Parr, an analyst at Cleveland-based McDonald Investments Inc. “A supply shortage, especially in flat-rolled steel, has hastened a recovery,” although additional bankruptcies are still possible at small suppliers of bar steel.

“What we are saying is that you need to keep a close, watchful eye on trade credit in these industries,” says Pate. “When the salespeople are pounding the table and saying that it’s time to pick up market share, you might want to be cautious.”

Tight Times

Public bankruptcies in 2001

Sector

Bankruptcies

Mining and construction 5
Manufacturing 66
Transportation, communications, electric, gas 29
Wholesale and retail trade 37
Financial, insurance, real estate 6
Services 53

 Sources: New Generation Research Inc., Compustat, PWC LLP