Bankruptcies drop as companies heal

Some companies can finally say, “Rumors of our bankruptcy were greatly exaggerated.”

Despite widespread speculation the credit crunch was going to grind up whole swaths of companies and force them into bankruptcy, companies are showing their mettle and are defying these dire predictions.

A dramatic drop-off in the number of companies going bankrupt is one of the most stark signs yet of how the Darwinian killing off of businesses is easing as the economy heals.

Perhaps more important for the future, though, is that the number of companies at immediate risk of failing is also sharply declining. This strength of companies pulling out of the recession gives further credence to the belief that despite the economy’s problems, there’s a recovery going on.

“The clean bill of health continues,” when it comes to the health of companies that have borrowed money, says Marilyn Cohen of Envision Capital. “Managements have been prudent. They have not squandered cash.”

The turnabout in the number of companies facing the bankruptcy grim reaper are dramatic, considering the:

•Falloff in the number of public companies going bankrupt. Just 106 public companies filed for bankruptcy in 2010, less than half the 211 that filed in 2009, BankruptcyData.com says.

And many lingering bankruptcies are coming from the same industry with well-known problems: financials. During 2010, nine of the 10 largest bankruptcies were banks and financial firms, a reflection of how the industry continues to pay the price for its lax lending standards.

•Escape from bankruptcy’s clutches. Just 3.3% of companies with the lowest credit ratings are defaulting, the lowest level in more than two years, Standard & Poor’s says. And a mere 6.1% of companies with low credit ratings are considered to be distressed, down from more than 80% in late 2008.

The number of companies teetering on the edge keeps shrinking. Only 114 companies worldwide, 70% of which are from the U.S., are on Standard & Poor’s “Weakest Links” list, a ranking of the companies at most risk of defaulting.

That’s down from the 228 that were on the list going into 2010 and the peak of 300 at the height of economic distress in March 2009. Companies such as Dole Food, Lear and Charter Communications are no longer considered Weakest Links because of upgrades in their business or financial outlooks. “Our stress indicators have backed off,” S&P’s Diane Vazza says.

•Concentration of pain in just a few challenged industries. Most of the companies at risk of running aground are in one of just five industries: media, oil and gas, utilities, chemicals and packaging, and financial. The fact the pain isn’t widespread among industries, though, is a good sign, as it shows specific business models are challenged, rather than the entire economy.

•Willingness of investors to lend money to companies. The fact investors are willing to give companies new loans at favorable terms is a promising sign. Even if companies were struggling, many could extend their debt for a second chance.

Already this year, companies are enjoying a record start to the year in terms of being able to sell debt. U.S. companies with the highest credit ratings sold a record $67 billion in debt in the first two weeks of the year, Thomson Reuters says. And that’s coming off 2010, where highly rated companies sold $728 billion in debt, the best year since the peak in 2007.

Even companies with the lowest credit ratings can borrow for just 5 percentage points more than equivalent government debt, Bank of America Merrill Lynch says. The premium is 75% less than it was in 2008, when many companies were under intense pressure with the credit crisis raging.

Yet all this improvement spells downside for the companies that still face financial challenges. With more companies looking healthy, the ones with issues look even worse.

S&P’s Weakest Links list still contains well-recognized companies, ranging from retailer Barneys New York to restaurants Perkins & Marie Callender’s and Sbarra, as well as Solo Cup.

Even more troublesome is the worry the drop-off in bankruptcies has little to do with improvement in business but, rather, easy credit markets. Many companies facing serious stress have put their pain off for later by taking on new loans, says George Putnam, publisher of Bankruptcy DataSource. Much of this refinanced debt will start to come due over the next couple of years, which might be when the pain is truly felt, he says.

The ability to take on new debt “has allowed many troubled companies to push out their day of reckoning,” Putnam says. “It could be 2012 and 2013 before we see bankruptcies head up again.”

By Matt Krantz, USA TODAY
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