Record bankruptcy year likely for U.S. companies

Adelphia, Kmart Corp., Global Crossing Ltd. lead list of corporate filings

July 21, 2002|By BLOOMBERG NEWS

WASHINGTON - U.S. corporate bankruptcies are headed for a second-straight record year after filings by Adelphia Communications Corp., Global Crossing Ltd. and Kmart Corp.

Last year, 255 publicly traded companies, led by Enron Corp., put $260 billion of assets under court protection, almost triple the record that stood for a decade. This year, 113 companies with $149 billion in assets have filed, according to BankruptcyData.com. WorldCom Inc., which listed $103.8 billion in assets in a Securities and Exchange Commission filing in May, might seek Chapter 11 protection after hiding costs to boost profits.

The recovering economy hasn't stemmed a bankruptcy trend fueled by corporate scandals and the collapse of last decade's speculative bubble. Reckless optimism created excess capacity in industries such as telecommunications, bankers and lawyers say.

"The worst isn't over by any means," said Ken Buckfire, a restructuring specialist with investment banking firm Miller, Buckfire Lewis & Co. "I don't see any decrease in the volume of bankruptcies for the next year-and-a-half to two years."

Enron, with $63.4 billion in assets, filed the largest Chapter 11 case in December. It would be dwarfed if WorldCom declares bankruptcy. The long-distance telephone company said it is trying to work out a plan with banks to avoid Chapter 11.

"I've never seen the magnitude and the concentration of financial failures in such a short period of time," said corporate lawyer David Heiman of Jones, Day, Reavis & Pogue, who has handled some of the biggest Chapter 11 restructurings. "There are some huge companies where the value has simply evaporated."

At the same time, the U.S. economy is recovering. Consumer spending, home sales and factory production are rising. Manufacturing expanded last month at the fastest pace in almost 2 1/2 years, according to an industry survey that also shows factories might be cutting fewer jobs.

"The economy may be headed for a comeback, but corporate bankruptcy filings are a lagging economic indicator," said Carter Pate, head of financial advisory services at PricewaterhouseCoopers. "Enron's collapse in December, other high-profile bankruptcies like Kmart, and accounting issues have added to the uncertainty that began with the acceleration of the recession on Sept. 11."

Last month, cable television company Adelphia Communications Corp. filed for Chapter 11 protection. Days earlier, XO Communications Inc., with $8.5 billion in debt, and the largest U.S. farm cooperative, Farmland Industries Inc., filed.

Five of the eight largest Chapter 11 cases in history have been filed since December. Besides Enron, they are telecommunications company Global Crossing, with $25.5 billion in assets; Adelphia, with $24.4 billion; retailer Kmart, with $17 billion; and NTL Inc., the United Kingdom's biggest cable television operator, with $16.8 billion.

Chapter 11 bankruptcy keeps the creditors of cash-strapped companies at bay while they restructure finances and negotiate a recovery plan, said Marcia Goldstein, a bankruptcy lawyer at Weil, Gotshal & Manges.

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