Mesirow Financial Consulting

Bankruptcies Rise as Economy Sinks
Many corporate borrowers are at risk due to the ongoing recession and difficult credit conditions. Bankruptcy filings spiked upwards during 2009, but there are currently mixed signals about the outlook for 2010. Moody's recently predicted that the 12-month default rate on speculative-grade debt would drop to 4.2% in October 2010 after reaching 12.4% in October 2009. However, many companies that defaulted in 2009 have avoided bankruptcy, pending negotiations with creditors. Many of these companies will be forced to file in 2010 as their options run out, possibly leading to a rise in Chapter 11 filings relative to 2009. There were 191 filings for Chapter 11 protection in the first three quarters of 2009 by companies with liabilities greater than $100 million, compared with 92 for the same period in 2008 and 38 for all of 2007. A notable trend in 2008 and 2009 has been in the direction of prepackaged bankruptcies, involving cooperative arrangements between lenders and debtors that generally shorten the time and expense of the Chapter 11 process.

Liquidity Eases as Recession Continues
The recession has put cash flow pressure on companies that levered their balance sheets when money was easy prior to 2008. Many cash-strapped companies could not roll over debt or obtain new alternative funds during the liquidity crisis of late 2008 and early 2009. The credit crisis resulted in extremely tight conditions in the market for debtor-in-possession (DIP) financing, making it infeasible for many troubled companies to seek protection under Chapter 11. The DIP market has eased considerably in recent months along with credit markets generally, and this trend should ease the process of entering and exiting bankruptcy in 2010.

Widespread Problems in Credit-Sensitive Sectors
Troubled industry groups in 2009 have included financial services, real estate, autos and auto parts, and media. A large number of recent bankruptcies involved leveraged buyouts. Observers expect a number of problems in the commercial real estate and transportation sectors during 2010. Notable large bankruptcies in 2009 have included General Motors and Chrysler (autos), CIT (financial services), General Growth and Thornburg Mortgage (real estate), LyondellBasell (chemicals), and Charter Communications (cable TV).

Warning for Stakeholders
Stakeholders should keep an eye out for potential warning signs of trouble, such as changes in management, continued operating losses, stretching of trade payment terms and problems with liquidity and cash flow. Companies experiencing accounting restatements, dependency on refinancings and weak industry fundamentals should also receive increased scrutiny in the months ahead.