Story from MSN Money
The B-word is in the headlines like never before. There were 7,843 commercial bankruptcy filings in March, according to AACER, a bankruptcy data management company. That's up 23% from the previous month and a staggering 65% from a year earlier. And the number of filings is accelerating.
"Bankruptcy typically has a lag behind what is going on in the marketplace," says Mike Bickford, the president of AACER, or Automated Access to Court Electronic Records. "So I think you are going to see increases in bankruptcy. . . at least over the next 12 to 18 months."
One potential victim: Blockbuster. On April 7, auditors speculated that the movie rental giant may have to declare bankruptcy before the year's end.
What company will be next to go? To find out, MSN Money took a look at credit default swaps. Swaps and other derivatives have been labeled "financial weapons of mass destruction" (by Warren Buffett himself), but they do serve legitimate purposes. Think of swaps, for instance, as a form of bankruptcy protection. Creditors that own swaps lower their risk of a debtor not paying back a loan, because a third-party insurer is on the hook for some of the unpaid debt.
Hedge fund managers, investment bankers and others can use credit default swaps to speculate on whether a company might be seen as a riskier borrower in the future. If that happened, the price of such default insurance would increase.
Sellers of credit default swaps for radio giant Clear Channel Communications, for example, currently want nearly 62 cents to insure a dollar's worth of that company's debt. That's known as the spread. And compared with how much sellers are charging to insure other companies' debts, that's a high premium.
MSN Money compiled a list of 30 companies the market judges to be the biggest bankruptcy risks, based on the credit-default-swap spreads on their five year bonds, the most widely-traded type.
Below are 10 big-name companies that made the unfortunate cut and why the market thinks they're in danger of failing. (You can see the full list here.) Blockbuster, surprisingly, was spared from the list because there are few buyers and sellers of protection on its debt. That's partly due to Blockbuster having just refinanced a $250 million revolving loan this month that severely threatened its ability to stay in business, and partly due to the fact that the new loan comes due in just 17 months.
Six Flags, the owner of more than 20 U.S. theme parks, is scarier for investors than the Dare Devil Dive, a ride at the company's Great Adventure & Wild Safari park in New Jersey. The company has a ton of debt and seemingly not enough money coming in to pay it off by the due dates.At the end of last year, the company had about $2.1 billion in debt, according to Standard & Poor's, which cut Six Flags' credit rating last month. The company lost about $37.8 million in 2008 and $70.6 million in 2007, according to filings with the Securities and Exchange Commission.
The company also has bills coming due. Six Flags must pay holders of certain preferred income shares, known as PIERS, $287.5 million, plus $31.3 million in accrued and unpaid dividends, by Aug. 15. If Six Flags can't pay and can't refinance its debt obligations, it will be considered in default, which will trigger provisions in other loans requiring that some creditors are paid early.
Rite Aid made the mistake of expanding right before a severe downturn. The drugstore chain acquired competitor Brooks Eckerd for $3.4 billion in 2007. The recession has slashed demand for everything from name-brand prescriptions to pricey anti-aging creams. Rite Aid's revenue was down nearly 2% last year, and performance was particularly bad at former Eckerd stores."What happened to Rite Aid happened to most retailers. But, unlike other retailers, we had just increased our size by more than 50% and embarked on a 16-month integration of more than 1,800 stores," Mary Sammons, Rite Aid's chairwoman, president and CEO, wrote in a March letter to shareholders.
The company posted a net loss of $1.1 billion for its fiscal 2008, which ended in March. Even worse, the company had debt of nearly $6 billion as of March 1.
Clear Channel. The main business of CC Media, the parent company of Clear Channel Communications, is selling ads, and that's a tough one in this market. The company posted a $3 billion loss in the fourth quarter of last year.As the largest radio company in the U.S., Clear Channel needs to put a lot of ads on the airwaves. So the steady decline in radio advertising -- the market is projected to shrink 11% this year -- has hammered the company. In the fourth quarter of 2008, its radio broadcasting unit's revenue was down 13% from a year ago.
Many media companies are facing similar problems. Worse for Clear Channel is that it recently borrowed the remaining $1.6 billion of the $2 billion in lines of credit it had available. That has some worried that CC Media, owned by private-equity firms Thomas H. Lee Partners and Bain Capital, is struggling to keep up with payments on the $17 billion-plus it has in outstanding debts.
Univision Communications, a massive Spanish-language media conglomerate also partly owned by Bain and Thomas H. Lee, is looking malo. In addition to suffering from the advertising slump hitting media companies, it also has large debts and is losing money. The company has about $10 billion in debts and posted a net loss of $5.1 billion for 2008, partly because it lowered the book value of several radio and TV properties.
Company executives insist Univision will be able to pay its debts. But investors are nervous. Even CEO Joe Uva acknowledged, in a March 30 statement, that its fourth-quarter results "reflect an operating environment that was among the most difficult we have seen across most industries."
Homebuilder Beazer Homes USA is a poster child for the housing market's woes. Though home sales rose 4.7% in February from the previous month, according to the U.S. Commerce Department, they were down about 40% compared with a year earlier. The homes that are selling are going because they're at unbeatable and, for homebuilders, unbearable prices. The average selling price is down about 18%. Beazer has posted large losses for the past two years, and its revenue was down 53.5% in its fiscal first quarter, which ended Dec. 31. It has about $2.1 billion in liabilities, and its existing lines of credit have been exhausted.
And with its debt insurance selling at one of the highest premiums on MSN Money's list, Beazer is sure to have difficulty refinancing.
The gambling industry has had an unlucky year. And Harrah's Entertainment is holding a particularly bad hand. The owner of more than a dozen casinos across the U.S., including Caesars Palace, Bally's and Paris Las Vegas, is highly leveraged because of a private-equity buyout. The company had more than $24 billion in debts at the end of 2008. Interest alone cost nearly $2 billion last year.
Harrah's isn't posting the profits needed to pay down its debts. It reported a $5.1 billion loss for 2008, partly because of write-downs on the value of some gambling properties. In a note to investors, Deutsche Bank securities analyst Andrew Zarnett said Harrah's will need to restructure and could lose customers due to business cuts.
Last month, Bloomberg reported that the owners of Harrah's had purchased about $2 billion of the company's debt. The move was widely seen as a sign that the owners are preparing for a bankruptcy filing, because owning more debt insures they have a larger voice in the bankruptcy restructuring process.
MGM Mirage is facing the same debt problems as Harrah's, as well as a nasty lawsuit with its Saudi partner over a new Las Vegas development. The owner of such celebrated Las Vegas Strip casinos as the Bellagio, Mandalay Bay and the Mirage has about $12.5 billion in long-term debt and posted a $1.1 billion loss in the fourth quarter of 2008, in part due to a drop in room reservations.
The bill for billions in MGM's debt was supposed to come due in March. But the company was able to persuade banks to extend the deadline until May 15. In its annual SEC filing, the company raised the possibility that it may not make the new deadline.
In addition to its debt position, MGM is fighting a lawsuit from Dubai World over the management of the $8.7 billion City Center project, a luxury condominium community on the Las Vegas Strip. The project is running over budget, and Dubai World appears to want out.
United Airlines. The airline industry's skies were supposed to be friendlier in 2009. But the industry emerged from one storm -- $147-a-barrel oil -- only to find itself facing a recessionary hurricane. The Federal Aviation Administration estimates that U.S. passenger traffic will drop 9% this year and forecasts a 5.7% revenue drop for airlines. Of all the airlines, United is on particularly shaky ground. Its parent company, UAL, said April 7 that traffic was down 13.6% last month compared with the previous March. Those results were slightly worse than many analysts and investors had expected. UAL also acknowledged this year that its attempt to create a low-cost airline, Ted, had failed. UAL shuttered the unit in January.
United also has a problem with how its ticket sales are structured. Credit card companies demand that the company set aside a reserve to pay them back for processing sales transactions. Such reserves are difficult to maintain when a company is operating at a loss, and UAL posted a $547 million loss for the last three months of 2008.
Ford Motor emerged as the healthiest U.S. automaker last year when it made clear that it didn't need a government bailout. But being the healthiest in the intensive-care unit doesn't mean that survival will come without some bitter medicine.Some investors fear bankruptcy could be that medicine. Ford posted a $14.6 billion loss in 2008. That was the company's worst performance in its history, adjusting for inflation.
And that likely will keep the company from making a further dent in its $15.9 billion debt. Although the company has shown some progress in restructuring its debt -- shaving off $9.9 billion in April to get below $16 billion -- it still has a lot of work to do before assuaging bankruptcy concerns.
What bankruptcy list would be complete without General Motors? Even with the federal government giving GM $13.4 billion in loans and potentially doling out more aid, GM is at the top of the list for riskiest borrowers. Last year was dismal for the company. It posted a $16.8 billion loss. That number jumped to $30.9 billion after the company included new estimates of the worth of Hummer, Saab and other brands.
This year doesn't look much better. In March, GM's sales were down nearly 45% from a year ago. Cadillac, Saturn, Saab and Hummer had the worst sales of all of GM's brands, and some of those are slated to disappear. The company is phasing out Hummer and Saturn, according to SEC filings. GM is also reportedly nearing a sale for Saab.
Without government aid, a GM failure is nearly certain. Although President Barack Obama’s auto task force rejected GM's restructuring plan Feb. 17, the government does seem committed to helping the company. It has suggested that GM file for bankruptcy protection in June if it is unable to get unions and bondholders to negotiate new agreements.
The 30 biggest bankruptcy risks
The following companies are listed from most endangered to least endangered, based on the credit-default-swap spreads on five-year corporate bonds on April 3. (Note: AbitibiBowater was at the top of the list on that date, but it filed for bankruptcy on April 16 and was removed.)Visteon
General Motors
Six Flags
Financial Guaranty Insurance
Hawker Beechcraft
Ineos Group
NXP Semiconductors
McClatchy
Unisys
CC Media
Beazer Homes USA
YRC Worldwide
Hellas Telecommunications II
Lear
Ono Finance
American Axle & Manufacturing
Harrah's Entertainment
Truvo Subsidiary
Ford Motor
Rite Aid
MBIA
Realogy
UAL
MGM Mirage
Freescale Semiconductor
Univision Communications
ArvinMeritor
Pioneer Electronics
Travelport
