Banking & Capital Markets

Going Belly-Up Up

Survey: Bankruptcies not at an all-time high, but high enough. Plus: lenders giving second chance to risky borrowers.
Alix Stuart and Joseph McCaffertyJuly 1, 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.”

Public bankruptcies in 2001



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

Attack of the Single-Bs
Companies with low credit ratings can expect a warmer reception in the capital markets these days. That’s because high-yield investors are more receptive to smaller, lower-rated companies than they have been in some time. Many companies with a high leverage ratio, a small revenue base, or a recent bankruptcy are getting a second chance.

The high-yield market is set to offer up approximately $100 billion this year, says Tim Conway, managing director for Fleet Capital Markets, largely to companies with some significant risk characteristics. By contrast, the $90 billion junk-bond market last year was “heavily weighted toward larger, more-frequent issuers,” he says.

Indeed, single-B rated companies–small, highly leveraged, or first-time issuers–floated nearly $22 billion in high-yield bonds in the first quarter of 2002. That’s up 28 percent from the fourth quarter of 2001, according to data gathered by Loan Pricing Corp. The trend was also evident in the leveraged-loan market, which ponied up $11 billion to single-B rated companies in the first quarter, up nearly 140 percent from the fourth quarter, even as investment-grade lending slowed.

Television broadcaster Sinclair Broadcast Group Inc., for example, issued $300 million in single-B rated 10-year senior subordinated notes at 8 percent in mid-March to repay a portion of its bank loans, even as Standard & Poor’s maintained its negative outlook on the Hunt Valley, Md.-based company. And Joy Global Inc., a mining equipment and service provider based in Milwaukee, floated $200 million in B+ rated 10-year notes at 8.75 percent in March, only 10 months after emerging from bankruptcy.

The trend portends brighter skies for all issuers. Why? Junk-bond investors tend to “look forward instead of in the rearview mirror,” says Conway. Increased liquidity in the market reflects an expectation of lower future default rates and a healthier economy in general.

Investors do have their limits, though. Several triple-C rated companies have recently pulled plans to raise capital. Nashville-based televised home shopping service Shop At Home Inc., for instance, dropped a planned $135 million senior secured notes offering shortly after S&P affirmed its CCC+ rating on the company in March. Investors are ready to take more risks, but it will be a long time before they are giddy again.

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