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Debt Management Law News

November 16, 2009

Bankruptcy Rise Slows With Thaw In Lending

he bankruptcy boom is going bust -- for now.

The financial crisis created one of the worst periods in U.S. history for corporate bankruptcies, felling the likes of Circuit City Stores Inc., General Motors Corp. and CIT Group Inc., the giant lender to small businesses.

Now corporate failures have slowed, as companies once on the verge of default have found a new life. These companies are now refinancing their balance sheets with new debt, pushing out maturities on existing loans or using distressed-debt exchanges to avoid a bankruptcy filing.

Speculative-grade companies -- or those with "junk" credit ratings -- have issued about $123 billion in new bonds this year, compared with roughly $48 billion in all of last year, according to data provider Dealogic. That's on pace to challenge 2006's record issuance of more than $143 billion, Barclays Capital analysts said late last week.

Many analysts worry the refinancing wave is just "kicking the can" down the road, without fundamentally fixing companies' deeper problems. Among weaker companies, about $1.4 trillion in bonds and loans will still come due in the next five years, said Dominic DiNapoli of FTI Consulting, a business advisory firm.

At the height of the credit crisis in January, Moody's Investors Service predicted that as much as 16.4% of U.S. junk-rated companies would have defaulted in the past 12 months. Some analysts said the default rate might not peak until early 2010.

Now, Moody's expects that U.S. default rate to peak at 13.6% this month and fall to 4.4% a year from now. Just three large publicly traded companies filed for bankruptcy-court protection in September and six filed in October, down from 16 in March, according to data compiled by Lynn LoPucki, a University of California, Los Angeles, law professor. Mr. LoPucki tracks filings by public companies with assets greater than $261 million.

In normal times, high debt issuance signals economic vigor, as companies use the money to expand. But today, new debt "is nearly 100% refinancing," said Citigroup Inc.'s Richard Banziger at a gathering of the Turnaround Management Association. "From that perspective, it's less healthy."

Despite the lull in corporate failures, there have been signs in recent weeks that bankruptcies could tick upward again. There have been several high-profile filings, including Capmark Financial and CIT. Already, five big companies have filed in November.

It remains unclear "how long the window will stay open" for weaker companies to borrow, said Barclays Capital restructuring chief Mark Shapiro. "Six months ago, no one thought that many of these companies could access the high-yield market." For the time being, he said, it's helping a lot of companies avoid "bankruptcies that would have otherwise occurred in the next year."

Distressed companies were shut out of credit markets in the winter as investors demanded yields on junk bonds that typically exceeded 20%. Now, average yields are closer to 10%, according to the Merrill Lynch U.S. High-Yield Master II Index.

The Federal Reserve has helped open up this market by keeping interest rates near zero. If the Fed interest-rate policy were to change, however, debt-laden companies could find it tougher to refinance their billions of dollars in debt coming due.

In effect, many of these struggling, debt-hungry companies were saved by the government: By keeping yields so low on safe securities like Treasurys, the government forced investors to buy riskier securities, such as junk bonds, if they wanted a decent return.

In April, for instance, auditors raised doubts about whether Blockbuster Inc. could avoid bankruptcy court. But in October, the movie-rental chain raised $675 million from the sale of new bonds to reduce looming obligations to banks. The company raised twice as much as it had first sought.

Other companies -- including casino operators Harrah's Entertainment Inc. and MGM Mirage, and homebuilder Beazer Homes Inc. -- have tapped credit markets to refinance existing debt after months of bankruptcy worries.

Some have been able to amend and extend their loans. Michaels Stores Inc. pushed out a $1 billion loan maturity by three years to 2016. Ford Motor Co., which averted government aid by grabbing $24 billion in financing three years ago, before credit markets collapsed, just asked its lenders to extend as much of its multibillion-dollar revolving credit facility as possible by two years, to November 2013.

Despite increased access to the market, most of the companies currently refinancing are still deep in junk territory. Many appear on a monthly Moody's watch list of companies at risk of defaulting on their debt. Moody's latest list -- formerly called the "Bottom Rung" -- flags 274 companies rated B3 or lower that carry roughly $263 billion of rated bank and bond debt. The companies represent nearly 18% of all U.S. companies Moody's rates.

Investors are willing to put money into these companies, though. They are also proving to be amenable to exchange offers -- where bondholders trade existing debt for new debt maturing later, equity in a restructured company, or both.

YRC Worldwide Inc., a struggling trucking company, just asked bondholders holding about $537 million in debt to exchange their holdings for 95% equity in a reorganized company. "We're doing all of this out of court," said Bill Zollars, YRC's chief executive.

Despite maneuvers like these, the debt totals coming due over the next five years represent "a staggering amount of money," said Michael Imber, who does restructuring work for financial-advisory firm Grant Thornton LLP. He and other experts said many businesses will remain challenged amid 10% unemployment and still-fragile markets.

"Nobody can forecast revenue right now. The consumer is still unsteady," Mr. Imber said. "There is going to be a steady stream of problems ahead of us."

Sometimes, debt can be overwhelming, and bankruptcy becomes necessary.
Bankruptcy can sometimes be difficult. If you are considering bankruptcy, contact the Houston bankruptcy lawyers of Weston & Associates, PLLC at 713-623-4242

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