Bankruptcy Rise Slows With Thaw In Lending

Posted by Andrew Lipsitz

The 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."

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