Experts Predict Wave of Bankruptcies

"The American consumer is arguably the weakest link in the credit chain," a financial advisor says.
Helen ShawNovember 9, 2006

Most professionals involved in bankruptcy restructuring expect a rise in bankruptcies within the next 12 to 18 months, according to a survey.

Over 70 percent of 90 restructuring pros in a survey by the American Bankruptcy Institute and Daily Bankruptcy Review expect that U.S.corporate restructurings will increase. Respondents to the July survey included attorneys, distressed-debt investors, financial advisors, investment bankers, and lenders.

The survey participants differ on the most likely trigger for the next wave of bankruptcies. But 48 percent predict that it will be interest rates. The other triggers respondents cited were: home prices, 15 percent; commodity prices, 13 percent; global competition, 7 percent; and the equity bear market, 5 percent. Others think that a decline in consumer spending and unfunded pension plans will be possible triggers.

But the impetus might not be so concrete. “I don’t think it’s going to be an event that’s the trigger,” stated John Penn, a partner at law firm Haynes and Boone, “I think it’s going to be more a realization that credit quality matters,” he said in the joint ABI and Daily Bankruptcy Review report on the survey, which was released today.

Respondents also listed the industries they expect will be the most affected by corporate bankruptcies. Eighty percent expect the real estate and construction industry to be “very” or “extremely” vulnerable to an economic downtown. Over two-thirds believe that retail is as vulnerable to an economic downturn. Also cited among the most likely industries to experience bankruptcies in the coming months were: airlines, 67 percent; manufacturing, 63 percent; and transportation, 49 percent.

“The sectors [that are] close to the default line are those that deal specifically with the consumer,” said Anders Maxwell, managing director of financial advisory firm Peter J. Solomon Co., during a Webinar announcing the survey results. “The American consumer is arguably the weakest link in the credit chain.”

Maxwell added that the creditworthiness of the average American corporation is weaker than it was 15 to 20 years ago. “That is masked today by staggering liquidity,” he said. The most frequently used metric for predicting whether a company might file for bankruptcy protection is operating cash flow – 54 percent of survey respondents refer to it when trying to predict whether a company will remain solvent.

Up until now this year, only a handful of companies with over $1 billion in liabilities have gone bankrupt, Edward Altman, a professor at the Stern School of Business, New York University, noted during the Webinar. That number is small relative to 2004 and 2005, when there were 10 large corporate bankruptcies in the United States in both years. An increase in restructurings is a certainty, he warns. “It will happen, but no one knows when,” said Altman.