15 April 2008
Culling the Herd
Posted by Joy Bischoff under: World Economy .
Thanks to Peterson Anderson for sending this along. One of the points of this article is that sick companies that should have died were kept alive. If you have a herd of cattle and you do not remove the terminally sick cattle, you put your whole herd in danger. The sickness spreads. We are not doing our economy any longer term favors to bail out some of these companies that are not only sick, but continue to pursue a sickly lifestyle.
Bankruptcies Rise for Firms `That Should Have Failed’
By Tiffany Kary and Caroline Salas
April 15 (Bloomberg) — U.S. corporate bankruptcies are accelerating as the economic slowdown compounds the end of easy credit.
The filing by Frontier Airlines Holdings Inc. April 11 followed those of three other airlines and companies in restaurants and retailing this year. Increased levels of distressed corporate debt signal that failures will accelerate, says Lynn LoPucki, a professor at the University of California, Los Angeles law school who studies bankruptcies…
“Money was so easy, companies that should have failed were kept alive,” said Rick Cieri, a bankruptcy lawyer at Kirkland & Ellis in New York. He said bankruptcies will include businesses “with severe operational problems” and too much debt. “Companies may well be sicker when they enter Chapter 11.”
A company bankruptcy isn’t just a sign of a weakening economy, LoPucki says. There is an economic effect…
Subprime Fallout
… “Now in the corporate market, the shoe is just beginning to fall, and we’re poised for a major correction that has been coming for at least a decade.”Bankruptcy filings have just begun to increase. According to court records compiled by Jupiter eSources LLC, Chapter 11 business bankruptcies, including small, nonpublic companies, increased 16 percent in the first quarter of 2008. Under Chapter 11 of U.S. bankruptcy law, a company seeks court protection from creditor lawsuits while working out a reorganization.
“I think this is the beginning,” said Brett Barragate, a bankruptcy lawyer at Jones Day in New York. “You have rising defaults into a market where it’s virtually impossible to get refinanced.”
Housing and Airlines
Some of the early bankruptcy filers this year reflect the decline in the housing industry, including homebuilder Tousa Inc. of Hollywood, Florida, and moving company Sirva Inc., of Westmont, Illinois. Now following them are small airlines fighting rising fuel costs and competition from bigger carriers.
“They have no way to avoid default,” said George Godlin, an analyst at Moody’s Investors Service in New York, speaking of Frontier. “They will continue to lose money in this environment, and the only way they can cease to lose money is by stopping operating.”
Virgin America Inc., the startup airline partly owned by U.K. billionaire Richard Branson, may be among the next airlines to fail, analysts at JPMorgan Chase & Co. and Avondale Partners LLC wrote in April 7 reports. The private airline lost $34.8 million in its first quarter of operation, which ended Sept. 30.
Las Vegas Casinos
Some issuers of bonds that are currently distressed, or considered at risk of default, are affected by cutbacks in spending by consumers. They include Claire’s Stores Inc. of Pembroke Pines, Florida; Michael’s Stores Inc. of Irving, Texas; and Herbst Gaming Inc., Tropicana Entertainment LLC and Station Casinos Inc., all of Las Vegas…
“It is apparent now that some companies may be postponing Chapter 11 filings because it’s not even clear they can fund themselves in bankruptcy,” Kirkland & Ellis’s Cieri said.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aaTdhmzxnz1k&refer=exclusive
4 Comments so far...
Jesse Says:
15 April 2008 at 2:20 pm.
I remember when Joy said she didn’t like putting up blogs about the economy because people wouldn’t hardly make comments and she knew that we were uncomfortable about that kind of thing. She said something like she had to do it some any way because things were going to change and we needed to have a heads up.
Man have things changed. Now that is almost all we are talking about. I still have friends telling me everyone is over reacting and things will be fine in a few months. I think one of the reasons we have to talk about this now is to try and help people understand the under lying causes and articles like this show the under pinnings coming loose. Getting the real picture is necessary if we are going to do the things we need to so we can help our families. I know it is easy to be afraid and want to ignore all this but that isn’t going to help us down the road. We won’t be as scared if we face this head on and do what we need to to be prepared.
Stumpy Says:
15 April 2008 at 2:33 pm.
This jist plain ruint my day. How am I gonna do my crafts if Michaels closes shop? I make such purty butterflies.
Bryon Says:
15 April 2008 at 5:58 pm.
Stumpy why do you go to a craft store? butterfly rabbit skins are so popular.
I watched a video in history today about the roaring twenties. It looks like the same thing as what is happening now. People are getting into debt they cant get out of and the culture is sliding down the tube. The great depression came next.
Sid Says:
15 April 2008 at 9:58 pm.
Can’t afford a bankruptcy? That was the weirdest part.
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