15 Companies That Might Not Survive 2009 66 comments
Rick Newman
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With Carol Hook, Danielle Burton, Jenny O'Shea, Bobbie Kyle Sauer and Stephanie Salmon
Who’s next?
With consumers shutting their wallets and corporate revenues plunging, the business landscape may start to resemble a graveyard in 2009. Household names like Circuit City (CCTYQ.PK) and Linens ‘n Things have already perished. And chances are those bankruptcies were just an early warning sign of a much broader epidemic.
Moody’s Investors Service, for instance, predicts that the default rate on corporate bonds – which foretells bankruptcies – will be three times higher in 2009 than in 2008, and 15 times higher than in 2007. That could equate to 25 significant bankruptcies per month.
We examined ratings from Moody’s and data from other sources to develop a short list of potential victims that ought to be familiar to most consumers. Many of these firms are in industries directly hit by the slowdown in consumer spending, such as retail, automotive, housing and entertainment.
But there are other common threads. Most of these firms have limited cash for a rainy day, and a lot of debt, with large interest payments due over the next year. In ordinary times, it might not be so hard to refinance loans, or get new ones, to help keep the cash flowing. But in an acute credit crunch it’s a different story, and at companies where sales are down and going lower, skittish lenders may refuse to grant any more credit. It’s a terrible time to be cash-poor.
That’s why Moody’s assigns most of these firms its lowest rating for short-term liquidity. And all the firms on this list have long-term debt that Moody’s rates Caa or lower, which means the borrower is considered at least a “very high” credit risk.
Once a company defaults on its debt, or fails to make a payment, the next step is usually a Chapter 11 bankruptcy filing. Some firms continue to operate while in Chapter 11, retaining many of their employees. Those firms often shed debt, restructure, and emerge from bankruptcy as healthier companies.
But it takes fresh financing to do that, and with money scarce, more bankrupt firms than usual are likely to liquidate - like Circuit City. That’s why corporate failures are likely to be a major drag on the economy in 2009: In a liquidation, the entire workforce often gets axed, with little or no severance. That will only add to unemployment, which could hit 9 or even 10 percent by the end of the year.
It’s possible that none of the firms on this list will liquidate, or even declare Chapter 11. Some may come up with unexpected revenue or creative financing that helps avert bankruptcy, while others could be purchased in whole or in part by creditors or other investors. But one way or another, the following 15 firms will probably look a lot different a year from now than they do today:
Rite Aid. (RAD); about 100,000 employees; 1-year stock-price decline: 92%). This drugstore chain tried to boost its performance by acquiring competitors Brooks and Eckerd in 2007. But there have been some nasty side effects, like a huge debt load that makes it the most leveraged drugstore chain in the U.S., according to Zacks Equity Research. That big retail investment came just as megadiscounter Wal-Mart (WMT) was starting to sell prescription drugs, and consumers were starting to cut back on spending. Management has twice lowered its outlook for 2009. Prognosis: Mounting losses, with no turnaround in sight.
Claire’s Stores. (Privately owned; about 18,000 employees.) Leon Black’s once-renowned private-equity firm, the Apollo Group, paid $3.1 billion for this trendy teen-focused accessory store in 2007, when buyout funds were bulging. But cash flow has been negative for much of the past year and analysts believe Claire’s is close to defaulting on its debt. A horrible retail outlook for 2009 offers no relief, suggesting Claire’s could follow Linens ‘n Things – another Apollo purchase – and declare Chapter 11, possibly shuttering all of its 3,000-plus stores.
Chrysler. (Privately owned; about 55,000 employees). It’s never a good sign when management insists the company is not going out of business, which is what CEO Bob Nardelli has been doing lately. Of the three Detroit automakers, Chrysler is the most endangered, with a product portfolio that’s overreliant on gas-guzzling trucks and SUVs and almost totally devoid of compelling small cars. A recent deal with Fiat (FIATY.PK) seems dubious, since the Italian automaker doesn’t have to pony up any money, and Chrysler desperately needs cash. The company is quickly burning through $4 billion in government bailout money, and with car sales down 40 percent from recent peaks, Chrysler may be the weakling that can’t cut it in tough times.
Dollar Thrifty Automotive Group. (DTG); about 7,000 employees; stock down 95%). This car-rental company is a small player compared to Enterprise, Hertz (HTZ), and Avis Budget (CAR). It’s also more reliant on leisure travelers, and therefore more susceptible to a downturn as consumers cut spending. Dollar Thrifty is also closely tied to Chrysler, which supplies 80 percent of its fleet. Moody’s predicts that if Chrysler declares Chapter 11, Dollar Thrifty would suffer deeply as well.
Realogy Corp. (Privately owned; about 13,000 employees). It’s the biggest real-estate brokerage firm in the country, but that’s a bad thing when there are double-digit declines in both sales and prices, as there were in 2009. Realogy, which includes the Coldwell Banker, ERA, and Sotheby’s (BID) franchises, also carries a high debt load, dating to its purchase by the Apollo Group in 2007 – the very moment when the housing market was starting to invert from a soaring ride into a sickening nosedive. Realogy has been trying to refinance much of its debt, prompting lawsuits. One deal was denied by a judge in December, reducing the firm’s already tight wiggle room.
Station Casinos. (Privately owned, about 14,000 employees). Las Vegas has already been creamed by a biblical real-estate bust, and now it may face the loss of its home-grown gambling joints, too. Station - which runs 15 casinos off the strip that cater to locals - recently failed to make a key interest payment, which is often one of the last steps before a Chapter 11 filing. For once, the house seems likely to lose.
Loehmann’s Capital Corp. (Privately owned; about 1,500 employees). This clothing chain has the right formula for lean times, offering women’s clothing at discount prices. But the consumer pullback is hitting just about every retailer, and Loehmann’s has a lot less cash to ride out a drought than competitors like Nordstrom Rack (JWN) and TJ Maxx. If Loehmann’s doesn’t get additional financing in 2009 – a dicey proposition, given skyrocketing unemployment and plunging spending – the chain could run out of cash.
Sbarro. (Privately owned; about 5,500 employees). It’s not the pizza that’s the problem. Many of this chain’s 1,100 storefronts are in malls, which is a double whammy: Traffic is down, since consumers have put away their wallets. Sbarro can’t really boost revenue by adding a breakfast or late-night menu, like other chains have done. And competitors like Domino’s (DPZ) and Pizza Hut have less debt and stronger cash flow, which could intensify pressure on Sbarro as key debt payments come due in 2009.
Six Flags. (SIX); about 30,000 employees; stock down 84%. This theme-park operator has been losing money for several years, and selling off properties to try to pay down debt and get back into the black. But the ride may end prematurely. Moody’s expects cash flow to be negative in 2009, and if consumers aren’t spending during the peak summer season, that could imperil the company’s ability to pay debts coming due later this year and in 2010.
Blockbuster. (BBI); about 60,000 employees; stock down 57%. The video-rental chain has burned cash while trying to figure out how to maximize fees without alienating customers. Its operating income has started to improve just as consumers are cutting back, even on movies. Video stores in general are under pressure as they compete with cable and Internet operators offering the same titles. A key test of Blockbuster’s viability will come when two credit lines expire in August. One possible outcome, according to Valueline, is that investors take the company private and then go public again when market conditions are better.
Krispy Kreme. (KKD); about 4,000 employees; stock down 50%. The donuts might be good, but Krispy Kreme overestimated Americans' appetite - and that's saying something. This chain overexpanded during the donut heyday of the 1990s - taking on a lot of debt - and now requires high volumes to meet expenses and interest payments. The company has cut costs and closed underperforming stores, but still hasn't earned an operating profit in three years. And now that consumers are cutting back on everything, such improvements may fail to offset top-line declines, leading Krispy Kreme to seek some kind of relief from lenders over the next year.
Landry’s Restaurants. (LNY); about 17,000 employees; stock down 66%. This restaurant chain, which operates Chart House, Rainforest Café, and other eateries, needs $400 million in new financing to finalize a buyout deal dating to last June. If lenders come through, the company should have enough cash to ride out the recession. But at least two banks have already balked, leading to downgrades of the company's debt and the prospect of a cash-flow crunch.
[EDITOR'S NOTE 2/9/09: Landry's did manage to sell $295.5 million in senior secured notes on Thursday, February 5.]
Sirius Satellite Radio. (SIRI) - parent company; about 1,000 employees; stock down 96%. The music rocks, but satellite radio has yet to be profitable, and huge contracts for performers like Howard Stern are looking unsustainable. Sirius is one of two satellite-radio services owned by parent company Sirius XM, which was formed when Sirius and XM merged last year. So far, the merger hasn't generated the savings needed to make the company profitable, and Moody's thinks there's a "high likelihood" that Sirius will fail to repay or refinance its debt in 2009. One outcome could be a takeover, at distressed prices, by other firms active in the satellite business.
Trump Entertainment Resorts Holdings. (TRMP); about 9,500 employees; stock down 94%. The casino company made famous by The Donald has received several extensions on interest payments, while it tries to sell at least one of its Atlantic City properties and pay down a stack of debt. But with casino buyers scarce, competition circling, and gamblers nursing their losses from the recession, Trump Entertainment may face long odds of skirting bankruptcy.
BearingPoint. (BGPT.OB); about 16,000 employees; stock down 21%. This Virginia-based consulting firm, spun out of KPMG in 2001, is struggling to solve its own operating problems. The firm has consistently lost money, revenue has been falling, and management stopped issuing earnings guidance in 2008. Stable government contracts generate about 30 percent of the firm's business, but the firm may sell other divisions to help pay off debt. With a key interest payment due in April, management needs to hustle - or devise its own exit strategy.
Disclosure: no positions
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This article has 66 comments:
On Feb 08 06:16 AM investor88 wrote:
> The article describes a economic situation with nothing to cheer
> about, so forget a sustained stock rally.
What's missing are the industrial, chemical, oil service, etc companies that have not yer reared their ugly heads..
they're not immune either.
I think I'd just as soon get a ranking from a fortune cookie.
By the way the parent company of Sirius and XM is called Sirius XM Radio, Inc. Not Sirius Satellite Radio. Thank you.
Looks as if it's game is about as good as Philly Mickelson's lately (primary corpoarate sponsor).
On Feb 08 08:56 AM Alan Brochstein wrote:
> The companies will survive for the most part, but the owners will
> change. As far as people losing their jobs, they will, as these
> companies will shrink in general. Let's hope that the new owners
> insist on building more sustainable business models that rely less
> upon massive debt...
The Rite Aid case is rather interesting. They have about $6 billion in debt, which is a huge albatross at the moment. However, there are not any significant principal payments due for a couple of years. So, I have a hard time envisioning what could happen in 2009 to take them down the tubes. It certainly won't be for lack of sales, as they are currently hovering around flat. True, that is a sad state of affairs. But how many retailers would love to be even with last year right now?
think what we may see is some asset sales (e.g.: sale of about 1200 west coast stores). Depending on the mix, these could net anywhere between $1 and $6 million per store, effectively halving the corporate debt while only decreasing the base by 25%. Other possibilities include a capital infusion from Jean Coutu Group, which owns about 1/3 of the common shares. Or, we could see more of what CVS and Caremark created last year. ExpressScripts or Medco could pick up RAD and create some synergies.
And, as a result, there will always be a listmaker who will compile a list of companies that either are failing to compete for whatever reason or are at the end of their functional utility and become obsolete. It doesn't mean that anything is much different now because we are in a harsh point in the cycle that displays company weaknesses more than in good times. Cycles do play a large part in timing but not substantially in the eventual overall outcome.
In my view, it's still a time to buy cash and free cashflow and to sell excess debt.
Here's my prediction. Many writers will have there jobs cut in 2009! I think alot of bullfat could be cut from someones books.
On Feb 10 06:09 PM tom Andersen wrote:
> Everything is bad. Yeah right. For instance: Imagine you own a car
> rental company. Since people are now looking for cheap cars, it is
> easy to sell your cars as they come off service. Also, buying cars
> from cash strapped manufacturers puts you in the drivers seat. Costs
> are down as gas is cheaper, employees stay longer, etc. It turns
> out it is not all bad.
On Feb 08 09:09 AM ailionmiller wrote:
> Correct me if I am wrong but Eckerds Drug Stores were bought out
> by CVS not Rad as claimed in the article
But I don't think so.
Tough love to you all.
For companies debt is less the issue than cash flow (save for the fact they are closely linked). Most companies have debt load. As long as they are manageable that is ok.
Anyways, it's good to see people looking at the Statement of Cash Flow and Balance Sheet more. The market has for too long looked only at the income statement and largely forgot to look at the other fundamentals like how they boosted income all these years (usually at the cost of higher leverage).
Highlight: "An alarming report by Mark Pittman and Bob Ivry of Bloomberg News emphasizes the point.
"The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged to provide up to $5.7 trillion more if needed," the Bloomberg duo reveal… These enormous pledges, Pittman and Ivry point out, would almost be enough to "pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.""
Or, decide for yourself if Britney is still, "Smokin Hot:"
photos.tmz.com/galleri.../ ...s_is_smokin_hot
Rite-Aid looks like a bankrupt company. Not only in the balance sheet kind-of-way, but in the "poorly organized, overpriced goods from a store with no hint of having any sort of market niche" kind of way. I never-ever shop at Rite-Aid unless it's the only place around. It's been screaming out "BANKRUPTCY" since at least the mid-90s.
I don't see how Krispy Kreme survives, either. On top of having one of the ugliest balance sheets out there, societal trends (health-consciousness) are moving against them.
Blockbuster has always had a "bland corporate movie chain trying to screw you out of as much money as humanly possible" vibe to it. It's no surprise to me that Netflix came in and undermined their business model.
I think Sirius will survive in some form; or at least satellite radio will survive (if not Sirius). Obviously, they have one of the ugliest balance sheets of them all and the stock is priced for bankruptcy right now, but on some level, I think satellite radio is an idea that is simply waiting to succeed. Maybe someone buys their assets or maybe they miraculously figure out a way to succeed - I don't know. But I'm not sure that I can convince myself that satellite radio (a good idea) will simply die off.
On Feb 10 12:57 PM connorport wrote:
> Why aren't the automakers on this list with the exclusion of Ford?
> Where's the airlines? Where's all of retail with maybe the exception
> of Wal-Mart. HELLO!!!!! recession! These articles that pinpoint certain
> companies with debt is rediculous. Its fair to say they have tanked
> and now run an article saying OOOOPsie!!! Bad business models! Thats
> rediculous considering you writers were pumping these stocks a mere
> year and a half ago.
>
> Here's my prediction. Many writers will have there jobs cut in 2009!
> I think alot of bullfat could be cut from someones books.
the stock got hammered of course and i wouldn't touch it. Their bonds look quite interesting, though!
On Feb 11 07:29 AM H.J. Huneycutt wrote:
> Great list.
>
> Rite-Aid looks like a bankrupt company. Not only in the balance sheet
> kind-of-way, but in the "poorly organized, overpriced goods from
> a store with no hint of having any sort of market niche" kind of
> way. I never-ever shop at Rite-Aid unless it's the only place around.
> It's been screaming out "BANKRUPTCY" since at least the mid-90s.
>
>
> I don't see how Krispy Kreme survives, either. On top of having one
> of the ugliest balance sheets out there, societal trends (health-consciousness)
> are moving against them.
>
> Blockbuster has always had a "bland corporate movie chain trying
> to screw you out of as much money as humanly possible" vibe to it.
> It's no surprise to me that Netflix came in and undermined their
> business model.
>
>
> I think Sirius will survive in some form; or at least satellite radio
> will survive (if not Sirius). Obviously, they have one of the ugliest
> balance sheets of them all and the stock is priced for bankruptcy
> right now, but on some level, I think satellite radio is an idea
> that is simply waiting to succeed. Maybe someone buys their assets
> or maybe they miraculously figure out a way to succeed - I don't
> know. But I'm not sure that I can convince myself that satellite
> radio (a good idea) will simply die off.
On Feb 08 09:09 AM ailionmiller wrote:
> Correct me if I am wrong but Eckerds Drug Stores were bought out
> by CVS not Rad as claimed in the article
Then rather than running his company and assets, he made a TV show about how great he was. Then sued a person he hired to work for him who won a job on his show. I mean what type of clown is this. Why are people even talking about him and not about his dad?
If Donald Trump owned a oil company he'd run it into the ground (Haha George Bush Jr. did exactly that. Then went to drug rehab. Then his dad got him a job. And then we elected him President. We can now see what that got us).
Knowledgeable investors will find fantastic opportunities of stocks that are oversold AND thrive in recession markets.
seekingalpha.com/artic...
Even in this article you get evidence....."One possible outcome, according to Valueline, is that investors take the company private and then go public again when market conditions are better."
Can you say PREMIUM anyone???
Blockbuster has been left for dead since the end of 2004 after the late fee fiasco. Sales have not declined more than 5% after closing hundreds of stores across the world. Activist Carl Icahn largest shareholder, placed retail veteran Jim Keyes into lead a turnaround. Its a month away from announcing 2008 profitability. Gaming and the recession will further help their efforts.
Its trading less than their EBITDA.
Don't like that one? Find another.....there are awesome value investment deals based on layman perceptions like this article.
Good article,
Smarter Investing-
www.InvestorPitStop.co...
> Blockbuster has been left for dead since the end of 2004 after the
> late fee fiasco. Sales have not declined more than 5% after closing
> hundreds of stores across the world. Activist Carl Icahn largest
> shareholder, placed retail veteran Jim Keyes into lead a turnaround.
> Its a month away from announcing 2008 profitability. Gaming and
> the recession will further help their efforts.
You may be correct about Blockbuster sales jumping because of a "cocooning" effect and increased gaming revenue. Alternatively, I see two threats that Blockbuster will face:
* Online gaming's growth necessarily competes with rentals of PS3, Wii, and Xbox games
* Netflix is able to provide movies at a lower cost than Blockbuster because they do not have costly retail space
Come on, Folks! It is small business! Small business employees 80% of the work force, not GM, IBM, Disney or Disneyland on the Potomac. There is not enough bailout money in the world to rescue all the "Bigs". True or False? And when they fail anyway, the only thing keeping the country from slipping into total meltdown, "the end of times" - will be the small business person. He will find a way to sell goods and services even when transportation is interrupted and the currency is 98% worthless. Always has been, always will be. History is nearly silent on these real heroes. But your common sense will verify this truth if you will use your brains.
Given this, here's an earth shaking idea: Don't make it harder for the small business person. That's what the bail outs are doing. And all the focus on BIG this and BIG that. Welfare never rescued any failing economy.
We are the only army that shots its own wounded. If we can't stop the Depression from coming, lets not bless the culprits and hamstring the heroes. Anyone listening? Helloooooooooo ?????
also check out Matt Simons on oil; every day oil stays below $150 / barrel the hole gets deeper and deeper
watch out for severe trouble from mid 2010 (the long depression!)
Suzy Badaracco Culinary Tides culinarytides.com
I have previously speculated in RAD among others, and here are some ideas--I don't own any shares of RAD now
Walmart buys it, and sells drugs, plus those 5000 RAD stores beome "Walmart Mini Stores"
A non-American drug chain etal retailer buys it
For instance In Europe there is "Carrefour" (sp?) chain, a typical prospect
RITE AID joint ventures with Dell, Lenovo or other companies seeking
retail store locations--even ice cream, hamburger, pizza, chicken, taco stands
I miss the ole fashion soda counter drug stores
Its not just expansion guys, its reasonable expansion. These companies are all expanding base on debt & when the banks are no longer lending because of the size of their debt, everyone cries foul. Come on!!!
On Feb 08 05:22 PM ED K wrote:
> On june 04,2007 Rite Aid completed the acquisition of 1854 Brooks/Eckerd
> drug stores making it the third largest drug store chain in the USA.
>
look at their marginal costs.. their model is not so capital intensive, so a pullback in distribution will not hit them hard
On Feb 08 10:24 PM cos1000 wrote:
> How would you propose that a company such as Sirius Xm build their
> network of satellites and recruit the best of talent. Developing
> a business model that doesn't include debt in its start-up is a bit
> naive. Conserving cash for operations until the venture becomes self
> sustaining is part of the leveraging process that gives a new company
> the most bang for the buck. Although, I agree that if the business
> model is bad that obviously the business will fail. The fact of the
> matter is that a bad business model only gets debt capital from fools
> in an over exuberant marketplace. I'm don't think, with growing revenues,
> in a contracting environment, that you can put Sirius Xm in the group.
>
>
> On Feb 08 08:56 AM Alan Brochstein wrote:
I concur with your assessments.
On Feb 08 09:09 AM ailionmiller wrote:
> Correct me if I am wrong but Eckerds Drug Stores were bought out
> by CVS not Rad as claimed in the article
1) raise rates
2) get bailed out like AIG
You may ask what the point of this rant is. Simply this: New thinking means thinking about business models that do not rely on insurance.