In a previous post, (see From Old Stories to New) I suggested that it is time to begin turning our attention away from mortgage-backed securities, the decline in M&A activity, and the difficulty that banks have had selling corporate paper. In a sense, this is old news. Sure, there are more write-downs to come for banks and other financial institutions, but it’s time to start turning our attention to the next leg down – non-financial corporate defaults and bankruptcies.

It has been my expectation that corporate defaults and bankruptcies will increase for two main reasons:

1. On the demand side, consumer weakness will reduce profitability

2. On the supply side, the credit crunch has made it more difficult for corporations to raise capital

We are now starting to see what I perceive to be the beginning of this increased trend. Corporate bond defaults thus far for 2008 have surpassed those for all of 2007 (see RGE Monitor). And as I mentioned in a previous post, the total number of bankruptcies filed this year have exceeded those from all of 2006. So let’s take stock of some of the bankruptcies announced so far in 2008:

• Wickes Furniture (furniture retail)
• Sharper Image (retail)
• Lillian Vernon (retail)
• Sirva (moving services)
• Blue Water Holdings (auto)
• Buffets Holdings (restaurants)

What do these bankruptcies share in common? Some are a result of weak balance sheets caused by excessive leverage associated with LBO deals (see Meet Seven Private Equity Buyout Victims). Others are more directly tied to the struggling consumer – housing, automobiles, clothing, and restaurants. A few (Wickes, Blue Water, and Buffets) were hit by the double whammy – weak balance sheets and a struggling consumer.

I will try to keep stock of high-profile bankruptcies and defaults in this blog as this this slowdown progresses. This should be one of the main stories of 2008. In the meantime, expect more of the same, with those firms closest to the consumer (especially in those industries hardest hit – home, auto, retail) and those firms with compromised balance sheets (not just those that are a result of excess leverage from LBO deals) among the first to go.

The beat goes on…

This entry was posted on Friday, February 22nd, 2008 at 9:32 pm and is filed under Corporate Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.