Tuesday, April 15, 2008

Bankruptcies Rise in Subprime Fallout

U.S. corporate bankruptcies areaccelerating as the economic slowdown compounds the end of easycredit. The filing by Frontier Airlines Holdings Inc. April 11followed those of three other airlines and companies in restaurants and retailing this year. Increased levels ofdistressed corporate debt signal that failures will accelerate,says Lynn LoPucki, a professor at the University of California,Los Angeles law school who studies bankruptcies. The amount of distressed corporate bonds jumped to $206billion April 11 from $4.4 billion in March 2007, according to aMerrill Lynch & Co. index of bonds yielding at least 10percentage points more than Treasuries. The share of leveragedloans considered distressed was 16 percent at the end of March,the highest since 1997, says Standard & Poor's, based on loanstrading below 80 percent of their face value. Some of the early bankruptcy filers this year reflect thedecline in the housing industry, including homebuilder TousaInc. of Hollywood, Florida, and moving company Sirva Inc., ofWestmont, Illinois. Now following them are small airlinesfighting rising fuel costs and competition from bigger carriers. Virgin America Inc., the startup airline partly owned byU.K. billionaire Richard Branson, may be among the next airlinesto fail, analysts at JPMorgan Chase & Co. and Avondale PartnersLLC wrote in April 7 reports. The private airline lost $34.8million in its first quarter of operation, which ended Sept. 30. Sagging Purchasing Power Some issuers of bonds that are currently distressed, orconsidered at risk of default, are affected by cutbacks inspending by consumers. They include Claire's Stores Inc. ofPembroke Pines, Florida; Michael's Stores Inc. of Irving, Texas;and Herbst Gaming Inc., Tropicana Entertainment LLC and StationCasinos Inc., all of Las Vegas. Linens 'n Things Inc., the Clifton, New Jersey-basedhousewares retailer, hired a restructuring company to explore The highest default rate for speculative bonds and loanssince 1983 was 9.98 percent in 2001, during the last U.S.recession. The average annual default rate over the same periodwas 4.48 percent, Moody's says. Default rates may not rise along with a company's financialdistress this time as they have in the past because somecompanies got so-called ``covenant lite'' loans, withoutrestrictions that can trigger defaults, said Kenneth Emery,Moody's director of corporate default research, in an interview.The covenants are usually financial ratios that measure abilityto service debts, such as a quarterly limit on total debtrelated to cash flow.

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