Sep 28, 2009
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Calm now, but more bankruptcies seen

Sep 28, 2009

NEW YORK (Reuters) - Bankruptcy professionals have noted a curious calm in the pace of corporate Chapter 11 filings, But don't relax yet, they say. A recent slowdown just marks a calm period before another storm of business collapses.

Things may be getting slightly better in the U.S. economy, and paradoxically, that makes it more likely companies will be pushed into bankruptcy in coming months. For one, the largest U.S. banks posted surprisingly strong profits during the first half of the year. That has made them more willing to foreclose on deadbeat debtors, pushing them into bankruptcy.

It is a marked change from the end of 2008, when lenders were so anxious to keep losses off their books that they extended loan deadlines for struggling companies.

"The calls (for restructuring advice) have slowed up," said Lawrence Adelman, co-founder of restructuring advisory firm AEG Partners. "But it is a lull. Banks have had time to get their reserves in balance and they're in a better position to take a writeoff."

"The commercial real estate market is starting to fall apart now," Adelman added.

In addition, media and auto-related companies are about four times more like to file for bankruptcy in the next year than companies in other industries, according to a study by Audit Integrity, which tracked liquidity, debt levels and other risk measures at more than 2,500 companies.

And most restructuring professionals say retailers, particularly those in the women's apparel and jewelry sector, are at risk for collapse.

"There will be more Chapter 11s, more out-of-court workouts," said Richard Mikels, a partner at law firm Mintz Levin. "The deleveraging that we need so badly, it's starting to happen."

Top restructuring experts, bankruptcy attorneys and distressed investors will address the outlook for struggling companies at the Reuters Restructuring Summit in New York and London next week. The specialists will also address which industries might be next in line and what steps can be taken to shore up weakened firms, as well as attractive investment opportunities.


The past 12 months brought the bankruptcies of such American icons as automaker General Motors Corp GM.UL and outdoor apparel maker Eddie Bauer (EBHIQ.PK: Quote, Profile, Research, Stock Buzz).

Bankruptcy filings have slowed somewhat. In August, there were just 10 public-company Chapter 11 filings, compared to 20 filings in July, according to bankruptcydata.com. But there are more to come, especially for any industries that are hurt by slower consumer spending.

"A lot of the retailers are truly hanging on by a thread," said Daniel Alpert, a managing director at Westwood Capital LLC, who advises distressed companies on restructuring measures.

New bankruptcies may not be as large or as recognizable but their impact will still ripple through the economy, bringing unemployment and balance-sheet losses.

"More jobs are lost, money is lost, banks and lenders have to take more loss," said Adelman. "People are affected."

But distress can also open the door for savvy investors to take advantage of discounted properties.

There will be opportunities "without a doubt," said Kjerstin Hatch, who specializes in distressed and defaulted securities as principal and portfolio manager at Madison Capital Management.

When companies default, their equity often tumbles into the hands of lenders who are loath to take on the responsibilities of a distressed company so they try to unload it quickly.

"They are not experienced in managing and they will sell that paper fairly quickly and at a discount to its inherent value. That creates opportunity," said Hatch, who helps manage $600 million and says her firm sees numerous investment opportunities currently.

By Chelsea Emery

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