List of Troubled Companies Keeps Growing

by: Rick Newman

Everybody hopes the economy bottoms out and starts to improve tomorrow. Or sooner. But there are few signs of an imminent recovery. One obvious indicator is the health of big companies – you know, the ones that have been announcing all those four- and five-digits layoffs recently. And the outlook for them seems to be getting worse, not better.

Moody’s, the ratings agency, recently published a list of “bottom rung” companies most likely to default on their debt. The criteria are technical, but the upshot is that a lot of companies are in deep trouble – and the list is getting longer, not shorter. Moody’s predicts that the default rate on corporate bonds this year will be three times higher than in 2008, and 15 times higher than in 2007. Defaults are often the last step before a bankruptcy filing. And bankrupt companies, obviously, don’t usually hire people. They dramatically shed costs and workers and sometimes liquidate completely, firing everybody.

So the Moody’s findings help explain why most economists expect the unemployment rate, now 8.1 percent, to rise as high as 9 or 10 percent before it starts to drift back down. And right now, real and perceived fears about job security are the main force driving a contraction in consumer spending, and the economy as a whole. Here’s what the bottom-rung report tells us about the next several months:

There will be a lot more bankruptcies. Moody’s places 283 companies on its bottom-rung list, up from 157 a year ago. Since the quarterly list was last updated, 73 additional companies have fallen to the bottom rung. Twenty-four companies made their way off the list – but mostly because they defaulted on their debts. Only one company, Landry’s Restaurants (LNY), got off the list because its circumstances improved.

Companies exposed to consumer spending have it toughest. The industries most represented on the list are media, automotive, retail and manufacturing. Companies in the most acute danger are those with reduced cash flow and a high debt load. A lot of big, well-known companies are in danger. On the list: Advanced Micro Devices (NASDAQ:AMD); AirTran (AAI); AMR (parent of American Airlines); Chrysler; Duane Reade; Eastman-Kodak (EK); Ford (NYSE:F); General Motors (NYSE:GM); JetBlue (NASDAQ:JBLU); Krispy Kreme (KKD); Palm (PALM); R.H. Donnelly (RHD); Reader’s Digest Association (NASDAQ:RDA); Rite-Aid (NYSE:RAD); UAL (UAUA) (parent of United Airlines); Unisys (NYSE:UIS); and US Airways (LCC).

Many of the other firms on the list are second- or third-tier suppliers to automakers, airlines, and other troubled firms. Being on the list doesn’t mean a firm is destined for bankruptcy. But it does mean the company faces severe constraints in terms of raising new capital, making new investments, and hiring. Instead of expanding, it may be far more inclined to sell assets, streamline or close divisions, and lay people off to cut costs and raise cash.

America’s malls are going to end up looking a lot different. The retail sector is obviously getting hammered, with chains like Circuit City and Linens ‘n Things already out of business. Many other retail chains are in trouble. Also on the bottom-rung list: Barney’s; BCBG Maz Azria; Blockbuster (BBI); Brookstone; Claire’s Stores (CLE); Eddie Bauer (EBHI); Finlay Fine Jewelry; Harry & David; Loehmann’s; Michael’s Stores (MIK-OLD); Oriental Trading Co.; and Sbarro. Again, this doesn’t mean the company is doomed. But many of these firms will restructure, close outlets, shrink, and find ways to transform themselves. So if you ever go back to the mall, and your favorite shop has disappeared, you’ll know why.

Disclosure: no positions