GM is perhaps the most high-profile example of the increase this year in US corporate bankruptcies
WHEN US federal bankruptcy judge Robert Gerber passed a controversial loan to Lyondell Chemical, the bankrupt chemical company, this year, he insisted that parts of the brief schedule for the company to reorganise itself be altered to account for an anticipated deluge in cases, particularly large, complex ones, that could jam up the court.
A week ago, Gerber was assigned to one of largest and most complex bankruptcy cases – that of General Motors (GM).
The federal government wants this one wrapped up in a matter of months. Just as GM enters the revolving door at the bankruptcy court for the southern district of New York, its Detroit rival, Chrysler, is on the way out.
In little more than a month after its chapter 11 filing, a slimmed-down version of Chrysler is expected to emerge as soon as today to be run by Italy’s Fiat.
GM is perhaps the most high-profile example of the increase this year in corporate bankruptcies. So far, 53 large companies have filed, surpassing the full-year tally for 2008, and that of all except four years since 1990, according to research by Lynn LoPucki, a professor at the University of California.
His study is based on companies with assets of more than $250 million (€179 million) and those that file annual reports with the US Securities and Exchange Commission. It does not include companies that were taken private through debt sales in recent years, so the actual number of companies on the brink will be higher.
Should the current pace continue, LoPucki estimates large public filings this year could reach 127. “Companies that would have in the past been bought out or been able to refinance their lending cannot do that in the current markets,” he says.
In a sign of the tight purse strings for companies in distress, both GM and Chrysler have been surviving on billions of dollars of loans from the US government.
Companies accumulated huge debt piles in recent years, which they are unable to support now that a weak economy is eating into sales and profits.
A recent rally in the credit markets may indicate the worst is over. Some strained companies have been able to get cash lifelines. Casino operator MGM Mirage, which warned of default just a few months ago, raised billions with stock and junk bond sales in May. Observers warn, however, that the financial alchemy of the credit boom still poses a threat for many companies.
By LoPucki’s tally, the current record year for large bankruptcies is 2001 with 97 cases, including Enron, which also filed in New York’s southern district, though its headquarters was in Houston.
Companies are known to “shop” for bankruptcy courts and New York’s southern district is often a desired location.
The judges at the New York and Delaware bankruptcy courts are widely viewed as financially savvy.
Eastern Airlines, based in Miami, filed for bankruptcy protection in New York’s southern district in 1989, using its New York-chartered Ionosphere Club to justify the venue. GM, based in Detroit, used a dealership in Harlem.
These judges "have truly 'seen it all before' and are comfortable making the tough decisions on an expedited basis", says Kenneth Buckfire, a managing director at Miller Buckfire. – (Copyright The Financial Times Limited2009)
