Business Bankruptcies: 2011 Will Likely Follow 2010 Lower
In another bit of good news for the domestic economy, the list of U.S. business bankruptcies will likely get shorter, and probably less distinguished, in 2011 just as it did this year.
While companies such as movie-rental chain Blockbuster and grocery institution A&P (GAP) reflected the struggling economy by declaring bankruptcy during the past few months, U.S. business bankruptcies through the third quarter fell 5.5% from a year earlier, while third-quarter bankruptcies alone were down about 8%, according to U.S. Bankruptcy Courts statistics.
The third quarter marked the fifth consecutive period that business bankruptcies fell. During second-quarter 2009, bankruptcies totaled more than 16,000, up 64% from a year earlier and the highest in at least 15 years, according to the American Bankruptcy Institute (ABI).
Living on Lenient Lenders
Larger companies fared even better. The number of bankruptcies year-to-date for businesses with more than $100 million in annual revenue, plunged 60% this year from a year earlier, according to ABI President Melissa Kibler Knoll.
Whether that decline reflects a rebounding economy is a matter of debate. Improving financing conditions for larger companies, revised bankruptcy regulations and rising costs related to declaring Chapter 11 may have had as much to do with the fall-off as the underlying economic conditions, according to executives in the restructuring business who were on a recent ABI-hosted panel.
"There are more of the large companies that either are limping along because their lenders and financial institutions are being lenient on defaults and extending time frames, or are figuring out how to restructure debts without using the court system," said Michael P. Richman, bankruptcy partner with Patton Boggs, on the panel. "It just costs a lot of money to reorganize a company in Chapter 11."
The Poor Get Poorer
That means that there'll likely be fewer monster bankruptcies such as Lehman Brothers, Washington Mutual and General Motors (GM), than there were during the past couple of years.
"The high-yield market has really rescued companies that are in distress," added Deirdre A. Martini, managing director of Wells Fargo's Wachovia Capital Finance unit. Martini also noted that so-called term-loan financing, which is largely used by smaller companies, "has not come back with any real robust activity."
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Thanks to the dichotomy in financing, bankruptcy numbers reflect a "poor-getting-poorer" scenario. As business bankruptcies fell, personal bankruptcies -- exacerbated by a U.S. unemployment rate stubbornly clinging near 10% -- have risen. Year-to-date nonbusiness bankruptcies increased 12% from a year earlier to 1.054 million, while third-quarter filings are up 6.7%.
With more financing options available for larger companies combined with difficult conditions for consumers, many companies in the hospitality, media and construction sectors will have a harder time staying solvent in the slow-growing economy compared with financial institutions, said J. Scott Victor, founding partner of SSG Capital Advisors, on the ABI panel.
Still, many smaller community banks are likely to go bankrupt in 2011 because they originated so many of the commercial real estate loans on properties that are now worth less than those loans, Knoll said.
The year that's now almost over saw some notable companies that couldn't make it without entering the restructuring process, including those in the following sectors:
Movie Rentals
While Americans haven't yet ditched the DVD as a primary home-entertainment media vehicle, many have ditched the DVD's two largest store chains. Weighed down by debt from its 2004 spin-off from former parent Viacom (VIA), Blockbuster was further hampered by customer dissatisfaction with its late fees and by the explosive growth of competitors Netflix (NFLX) and, more recentily, movie-kiosk leader Redbox (CSTR). Smaller rival Movie Gallery was also debt-ridden from its 2005 acquisition of Hollywood Video and shut its doors this year.
Media
National Enquirer parent American Media declared bankruptcy last month, though it's working on a plan to emerge. Affiliated Media, whose newspapers include the Denver Post and San Jose Mercury News, entered, then exited, bankruptcy this year. Both companies were crushed by large debt loads, declining advertising and competition with free content on the Internet.
Groceries
Great Atlantic & Pacific Tea, owner of A&P supermarkets and other brands, is among a group of old-line supermarket chains that have been beset by the combination of growing competition from higher-end groceries such as Whole Foods and general retailers like Walmart, which has expanded its food offerings. The 151-year-old company declared bankruptcy this month, though it continues to operate.
Financials
Bond insurer Ambac (ABK) declared 2010's largest U.S. bankruptcy last month after attempting to restructure for the past three years. Hit hard by the real estate and foreclosure crisis, Ambac is also suing the U.S. for attempting to seize $700 million in tax refunds.
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