The Deal

Cashed out

Coming after 17 years during which bankruptcies declined about 5%, many companies may be lulled by a false sense of security.

著者：Sam Rovit and Allen Schaar

First published on 8月 08, 2008
min read


To the rising flood of challenging U.S. economic news, add this: an imminent tidal wave of corporate bankruptcies. Coming after 17 years during which bankruptcies declined about 5%, many companies may be lulled by a false sense of security. Based on our analysis, however, speculative-grade debt defaults will increase in the U.S. by 5 to 10 times over 24 months. Typically, two-thirds to three-quarters of defaults end in bankruptcies within three months. That converts to 50 to 75 bankruptcies in 2008—with 28 filings by mid-May of this year, up from 13 in all of 2007—and 85 to 105 in 2009. And the numbers will rise if the economy actually pitches into recession. Many of these companies will be large and well known, with assets exceeding $100 million. The sheer magnitude of these bankruptcies, combined with the impact on everything from capital expenses to hiring, will generate aftershocks to business and consumer confidence. The pain will hit suppliers, too, as orders dwindle and receivables fetch pennies on the dollar. Meanwhile, banks preoccupied with payments will tighten the flow of new credit that would keep distressed firms afloat. While a number of these companies are already teetering, public signs are absent. Some firms have debt with few covenants or the option to toggle between interest payments or "payment in kind." Some simply had the foresight, or luck, to have negotiated large revolving credit agreements. Still, the approaching big-company bankruptcy wave was entirely predictable, though its severity was not. Swings in bankruptcy filings move along the same trend lines as declines in gross domestic product and trail economic downturns by 12 to 18 months. What balloons the impending numbers is a triple whammy: the recent run-up in large, highly leveraged buyouts, combined with today's extremely limited refinancing possibilities and the slowdown in corporate earnings growth. The underlying problem is evaporating internal liquidity. Illustrated by the recent surge in airline bankruptcy filings, many companies learned to play it close to the edge in cash reserves. For most, the impetus was not low profit margins. Rather, it stemmed from widely available speculative debt through junk bonds and leveraged loans. Some business-hungry lenders exhibited the same suspension of judgment. "Covenant-lite" loans, which lack the normal financial circuit breakers to ensure lenders get repaid, have risen from almost nothing in 2005 to about $97 billion in 2007, or nearly 20% of all leveraged loans issued. That removed a critical early-warning system for financial markets, banks and companies. Which industries will likely be affected? The first, of course, was the housing sector. Others to follow are the most consumer-sensitive: retailers and restaurants, auto-related businesses, media and entertainment, consumer packaged-goods companies and travel and leisure providers. Companies in danger typically focus on accounting profit instead of cash, pay insufficient attention to tightening working capital and show a reluctance to sell assets to pay down debt or close flagging operations. Ironically, the behavior of both corporate borrowers and lenders was consistent with what they believed was manageable risk only a few months ago. Plentiful credit combined with the pressure to grow meant that many companies borrowed heavily. But a large amount of vintage debt is coming due in about four years, with the growth in maturing issuances forecast to jump 43% annually, from $26 billion in 2008 to $76 billion in 2011. The total of leveraged loans and high-yield bonds coming due will rise from $183 billion to $285 billion. Thus, the firms that navigate the difficult waters over the next 24 months will face a second challenge when it comes time to refinance as banks ratchet down leverage ratios from their peak of 6.2 in 2007. That places a premium on having a cash-heavy balance sheet—another reason for companies to act quickly to conserve cash. When companies wait until liquidity is almost gone or a loan covenant is about to be broken, the predictable result is a cascade of creditor reactions that usually hastens bankruptcy. Sam Rovit is a partner in Bain Corporate Renewal Group, based in Chicago, and until recently was CEO of Swift & Co. Allen Schaar is a partner in Bain Corporate Renewal Group, based in Dallas.

To the rising flood of challenging U.S. economic news, add this: an imminent tidal wave of corporate bankruptcies.

Coming after 17 years during which bankruptcies declined about 5%, many companies may be lulled by a false sense of security. Based on our analysis, however, speculative-grade debt defaults will increase in the U.S. by 5 to 10 times over 24 months.

Typically, two-thirds to three-quarters of defaults end in bankruptcies within three months. That converts to 50 to 75 bankruptcies in 2008—with 28 filings by mid-May of this year, up from 13 in all of 2007—and 85 to 105 in 2009. And the numbers will rise if the economy actually pitches into recession.

Many of these companies will be large and well known, with assets exceeding $100 million. The sheer magnitude of these bankruptcies, combined with the impact on everything from capital expenses to hiring, will generate aftershocks to business and consumer confidence. The pain will hit suppliers, too, as orders dwindle and receivables fetch pennies on the dollar.

Meanwhile, banks preoccupied with payments will tighten the flow of new credit that would keep distressed firms afloat.

While a number of these companies are already teetering, public signs are absent. Some firms have debt with few covenants or the option to toggle between interest payments or "payment in kind." Some simply had the foresight, or luck, to have negotiated large revolving credit agreements.

Still, the approaching big-company bankruptcy wave was entirely predictable, though its severity was not. Swings in bankruptcy filings move along the same trend lines as declines in gross domestic product and trail economic downturns by 12 to 18 months.

What balloons the impending numbers is a triple whammy: the recent run-up in large, highly leveraged buyouts, combined with today's extremely limited refinancing possibilities and the slowdown in corporate earnings growth.

The underlying problem is evaporating internal liquidity. Illustrated by the recent surge in airline bankruptcy filings, many companies learned to play it close to the edge in cash reserves. For most, the impetus was not low profit margins. Rather, it stemmed from widely available speculative debt through junk bonds and leveraged loans.

Some business-hungry lenders exhibited the same suspension of judgment. "Covenant-lite" loans, which lack the normal financial circuit breakers to ensure lenders get repaid, have risen from almost nothing in 2005 to about $97 billion in 2007, or nearly 20% of all leveraged loans issued. That removed a critical early-warning system for financial markets, banks and companies.

Which industries will likely be affected? The first, of course, was the housing sector. Others to follow are the most consumer-sensitive: retailers and restaurants, auto-related businesses, media and entertainment, consumer packaged-goods companies and travel and leisure providers.

Companies in danger typically focus on accounting profit instead of cash, pay insufficient attention to tightening working capital and show a reluctance to sell assets to pay down debt or close flagging operations.

Ironically, the behavior of both corporate borrowers and lenders was consistent with what they believed was manageable risk only a few months ago. Plentiful credit combined with the pressure to grow meant that many companies borrowed heavily. But a large amount of vintage debt is coming due in about four years, with the growth in maturing issuances forecast to jump 43% annually, from $26 billion in 2008 to $76 billion in 2011. The total of leveraged loans and high-yield bonds coming due will rise from $183 billion to $285 billion.

Thus, the firms that navigate the difficult waters over the next 24 months will face a second challenge when it comes time to refinance as banks ratchet down leverage ratios from their peak of 6.2 in 2007.

That places a premium on having a cash-heavy balance sheet—another reason for companies to act quickly to conserve cash. When companies wait until liquidity is almost gone or a loan covenant is about to be broken, the predictable result is a cascade of creditor reactions that usually hastens bankruptcy.

Sam Rovit is a partner in Bain Corporate Renewal Group, based in Chicago, and until recently was CEO of Swift & Co. Allen Schaar is a partner in Bain Corporate Renewal Group, based in Dallas.