Fri, Nov 23, 2001 page21

• Business bankruptcies in US soar

  ECONOMY A host of American companies that have been teetering on the edge of failure were pushed over the edge following the Sept. 11 attacks in the US

  • BLOOMBERG
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  Net2000 Communications Inc had teetered toward insolvency before Sept. 11. The terrorist attacks that jolted the economy made bankruptcy inevitable for the phone and Internet service provider, said Clayton Thomas of the business he heads.

  "I have been in the front car of a roller coaster," he said. "Sept. 11 changed everything. All bets were off." Thomas's decision to seek bankruptcy protection for his Herndon, Virginia-based company is one that has confronted hundreds of executives dealing with mounting debt and declining sales. A record 224 publicly traded companies with more than US$180 billion in assets filed for bankruptcy this year, 27 percent more than last year's record 176, says BankruptcyData.com, a Boston-based Web site that tracks such filings.

  The collapse of unprofitable Internet businesses, a faltering economy after an unprecedented decade of expansion, overconfidence and over-expansion contributed to the carnage. Since hitting a peak of 5,048 on March 10 last year, the NASDAQ has plunged 63 percent.

  The bankruptcy victims include such brands as AMF Bowling balls, Polaroid cameras, Converse sneakers, Schwinn bicycles, Vlasic pickles, Coleman camping supplies and Sunbeam appliances.

  Companies that depend on travel and tourism, including the parent of Alamo Rent-A-Car and National Car Rental, have been particularly hard hit.

  Last week, Greensboro, North Carolina-based Burlington Industries Inc, once the world's largest textile maker, became the 38th company with more than $1 billion in assets to seek Chapter 11 protection this year. That's almost double the previous record of 21 set last year.

  The booming 1990s inflated share prices, letting companies accumulate debt with junk bonds and big bank loans. Sliding share prices and increased debt means a "double whammy" now, said Henry Miller, vice chairman and head of restructuring at Dresdner Kleinwort Wasserstein, an investment banking firm.

  "We're paying the piper for an over-optimistic view of future performance."

  A multibillion dollar Chapter 11 filing affects thousands of people, including employees, customers, suppliers, investors and other creditors. The effects can spill over into healthy businesses, says Bill Brandt, president of Chicago-based turnaround firm Development Specialists Inc.

  Still, bankruptcies give companies the chance to change strategies and fix mistakes. The court-supervised process can take years to complete, and sometimes leads to liquidation.

  Trans World Airlines Inc. spent the better part of a decade in bankruptcy before AMR Corp's American Airlines bought it out of its third Chapter 11 in January for US$4.2 billion.

  Travel and tourism

  Businesses that rely on travel and tourism have suffered particularly since the Sept. 11 attacks.

  Two cruise lines, the VecTour Inc bus line, Las Vegas's Aladdin casino, Planet Hollywood International Inc and several other restaurant chains have filed for bankruptcy. Midway Airlines Corp, which had filed for reorganization in August, stopped operating on Sept. 12.

  US corporations are more likely to file for bankruptcy today because the stigma has faded, said Chuck Tatelbaum, a Naples, Florida, attorney. The advantages include escaping from unprofitable leases and onerous union contracts, he said.

  ``Filing for bankruptcy is now looked upon as a business strategy rather than an admission of failure,'' said Tatelbaum, former vice president for research at the American Bankruptcy Institute.

  Bankruptcies were on the rise well before Sept. 11. Flocks of telecommunications and Internet start-ups, movie theater chains, retailers, chemical companies and textile and apparel manufacturers opted for Chapter 11 earlier this year. The largest movie theater chains, including Regal Cinemas Inc. and Loews Cineplex Entertainment Corp, were mired in red ink after new "multiplex" theaters led to an oversupply of screens.

  Bethlehem Steel Corp joined LTV Corp and more than a dozen other steelmakers in bankruptcy court due to competition from low- priced imported steel.

  In April, California's largest utility, Pacific Gas & Electric Co, became the third-largest Chapter 11 case ever behind Texaco Inc in 1987 and Financial Corp of America in 1988. The utility lost more than US$9 billion paying more for power than it could bill customers under the state's flawed deregulation scheme.

  Lax lending standards and an overheated junk-bond market in the late 1990s allowed companies to borrow with ease.

  "These days banks are terrified," Miller said. "As the value of collateral deteriorates, it becomes harder to get rescue loans."

  Internet and telecommunications companies such as Net2000 comprise the largest group seeking bankruptcy help. Net2000, founded in 1993, went public on March 7, 2000, and traded as high as US$40. It last traded at 20 cents.

  "The market simply overestimated how much the world needed telecom services," said Terry Savage, co-head of restructuring at Lazard Freres & Co.

  Among the dozens that chose the sanctuary of Chapter 11 are At Home Corp, 360networks Inc, Covad Communications Group Inc, NorthPoint Communications Group Inc, PSINet Inc, Teligent Inc and WinStar Communications Inc.

  Upstart phone companies may never repay almost 80 percent of their combined US$900 billion in debt, a failure exceeding the savings and loan industry collapse of a decade ago, former Global Crossing Ltd Chief Executive Leo Hindery Jr. recently said.

  The claims by creditors of many bankrupt high-tech companies have become almost worthless. Viatel Inc, for instance, couldn't find a buyer at any price for a fiber-optic network it spent more than US$2 billion to build.

  "I've never seen businesses of this magnitude being rendered non-viable," said Jeff Werbalowsky, co-head of restructuring at Houlihan Lokey Howard & Zukin. "There's been more money wiped out than I've ever seen in 20 years of restructuring work."

  Companies with strong brand names or core cash-generating assets to rally around have a better shot of survival and becoming profitable, experts say.

  "Technology start-ups with a single line of business, few hard assets or big investment in assets with little value are very difficult, if not impossible, to reorganize," said Al Koch, chief operating officer at turnaround consulting firm Jay Alix & Associates.

  The increase in bankruptcies is likely to continue, said David Hamilton, director of default research at Moody's Investors Service, citing an accelerating junk-bond default rate.

  The default rate on the high-yield bonds reached 9.6 percent last month, the highest since 13 percent in July 1991, he said. He predicted it may peak near 11 percent in the first quarter next year.

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