More Tribunes, Lehmans likely in coming months
Attorneys say conditions are ripe for continued wave of bankruptcy filings
By Russ Britt, MarketWatch
Last update: 6:30 p.m. EST Dec. 8, 2008Comments: 106LOS ANGELES (MarketWatch) -- Consider the Lehman Brothers bankruptcy a few months ago and Monday's filing by private-media giant Tribune Co. as shots across the bow, according to attorneys in the field.
A sour economy and tight credit market clearly are just the right ingredients to bring about a wave of bankruptcies, they say. Companies deeply in debt like Tribune are likely to be vulnerable as the troubled economy shakes out the strong from the weak, and they may fall into a situation where filing for bankruptcy protection is their only alternative.
"It seems like a lot of these companies were in a mode where they took on a lot of debt to acquire businesses," said David Hagen, a bankruptcy attorney in Woodland Hills, Calif. "I'm sure there's a ton more that are going to [file]."
The list of high-profile bankruptcies has grown quickly in a short time, even though a number of companies teetering on the brink have been helped by government aid. Since Lehman (LEHMQ:Lehman Brothers Holdings Inc
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LEHMQ 0.04, 0.00, -2.5%) kicked things off in mid-September, it was quickly followed by Washington Mutual (WAMUQ:Washington Mutual Inc
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WAMUQ 0.03, 0.00, -7.3%) , which couldn't avoid bankruptcy despite selling its retail-bank outlets to J.P. Morgan Chase & Co. (JPM:JPMorgan Chase & Co
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JPM 34.21, -2.28, -6.2%)
Lehman wasn't the first company to file for bankruptcy in 2008, but it is the largest by far. Its demise was the first signal of serious deterioration in the economy. The company has $768 billion in bank and bond debt, due mostly to its massive exposure to subprime mortgages. Assets were listed in September at $639 billion; the company's annual sales are $59 billion.
Also falling in the subprime crisis, Washington Mutual followed Lehman a few days later when regulators seized the company's banks and put them up for sale. J.P. Morgan was the winning bidder. What was left was the shell of a corporation, with $16 billion in annual sales, $33 billion in assets and $8 billion in debt. It filed for Chapter 11 in late September.
'It's the same story every economic cycle. The shapes of the bankruptcies change a little bit. The ones who learn the most are the creditors, not the debtors.'
— Rich Levin, bankruptcy attorney
"It's the same story every economic cycle," said Rich Levin, a bankruptcy attorney in New York. "The shapes of the bankruptcies change a little bit. The ones who learn the most are the creditors, not the debtors."
Circuit City (CCTYQ:Circuit City Stores, Inc.- Circuit City Group
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CCTYQ 0.17, +0.01, +3.1%) tumbled into bankruptcy in November, but retailers were feeling the pinch even before Lehman went asunder. In May, Linens 'n Things filed for Chapter 11 and said it planned to come out of bankruptcy in 2009. But in October, the company switched gears and said it planned to liquidate.
Circuit City, the nation's second-largest electronics retailer behind Best Buy Co. (BBY:Best Buy Co., Inc
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BBY 23.93, -0.35, -1.4%) , finally succumbed to market conditions that made it difficult to compete. Best Buy was grabbing increasing market share while big-box retailers Wal-Mart Stores Inc. (WMT:Wal-Mart Stores, Inc
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WMT 56.28, -1.28, -2.2%) and Target Corp. (TGT:target corp com
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TGT 38.72, +0.40, +1.0%) have expanded their own electronics offerings.
It now seeks a $1.1 billion line of credit. Circuit City had assets of $3.4 billion and debt of $2.32 billion when it filed for bankruptcy protection. Annual sales were $12.4 billion
The bankruptcy bug appears to be hitting all sectors, though. Pilgrim's Pride (PGPDQ:Pilgrim's Pride Corporation
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PGPDQ 0.34, +0.03, +7.9%) met the same fate. The chicken producer filed for Chapter 11 protection on Dec. 1 and received approval to access $365 million in debtor financing a few days later.
The company's debt load is $2.72 billion, roughly half its annual sales.
Tribune's situation is much more dire. The debt that owner Sam Zell took on to turn the owner of the Chicago Tribune, Los Angeles Times and Baltimore Sun -- as well as the Chicago Cubs and various other media assets -- from public to private was costly. Estimated debt now stands at nearly $12 billion, on $5.1 billion in annual sales.
Which of these companies will emerge leaner and meaner? Much of it depends on what assets they have to sell off that could prove attractive to bankruptcy judges and creditors.
But the environment is favorable right now, as evidenced by the financial-services firms that have received government bailouts, as well as car companies primed for a similar deal, according to Paul Brent, a Los Angeles-based bankruptcy attorney. There's strength in numbers, he said.
"The lesson to be learned right now is to be part of a really large problem because you get the kind of accommodation that I've never seen before," Brent commented.
Russ Britt is the Los Angeles bureau chief for MarketWatch.
