For Businesses Big and Small, It's Lights Out

Circuit City has gone the way of other major retailers such as Linens 'N Things and KB Toys, announcing it will liquidate its assets and close stores.
Circuit City has gone the way of other major retailers such as Linens 'N Things and KB Toys, announcing it will liquidate its assets and close stores. (By Amy Sancetta -- Associated Press)
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By Annys Shin
Washington Post Staff Writer
Sunday, January 18, 2009

With the economy in the tank, companies are doing all they can to stay afloat. For many, though, even the most desperate measures have not been enough.

Former giants in American business have recently tilted into extinction. Circuit City announced Friday it would follow Linens 'n Things and Sharper Image into liquidation and sell its assets. Over the next two years, analysts say, countless other businesses will simply fade away.

"This is now an unprecedented time as far as how bad things have gotten," said Scott Peltz, managing director of RSM McGladrey, a consulting firm that helps turn around troubled companies.

The number of business bankruptcy filings rose sharply in 2008, with 31 percent more companies looking to liquidate -- instead of just restructure their debt -- in the third quarter than in the first.

They have little choice. Many companies are loaded down with debt amassed in the days of easy money. Servicing that debt is harder because of falling revenue. Lenders, facing their own troubles, are not as eager to refinance. And the buyers that can afford an acquisition right now are few and far between.

Circuit City, for instance, filed for Chapter 11 bankruptcy protection in November and tried to strike a deal with lenders while it also looked for a buyer. On Friday, just over two months later, it said that both of those efforts failed, and that it would close its remaining 567 locations, putting more than 30,000 people out of work.

The Richmond retailer owes its creditors more than $2.3 billion, making it one of 146 companies with at least $100 million in liabilities that filed for bankruptcy last year, according to statistics from Edward Altman, a corporate finance expert at New York University's Stern School of Business. In 2007, 38 companies with assets greater than $100 million filed.

Many of the headline-grabbing bankruptcy filings recently have come from retailers. But analysts are seeing filings rise across a broad range of industries such as hospitality, gaming and automotive suppliers. This month, Nortel Networks, one of the nation's largest makers of phone equipment, filed for bankruptcy. So did the U.S. operations of petrochemical giant LyondellBasell.

Meanwhile, for every major corporation staring at insolvency, there are thousands of smaller and midsize businesses in the same predicament but with fewer resources to weather bad times. The owners of Franklin Equipment Co., a manufacturer of logging tractors in the western Tidewater area of Virginia, said earlier this month that they would file for Chapter 7 and sell off their assets after 46 years in business, putting about 70 employees out of work. Clyde Parker, Franklin's personnel director, said the company was done in by a drop in demand for lumber and paper products, financing issues and a dearth of interested buyers.

"We've been through a lot of downturns over the years . . . but none near as severe as the one we're in now," Parker said.

Many businesses are paying dearly for the easy terms under which they borrowed money just a few years ago. During the height of the debt craze in 2006 and 2007, lenders let borrowers take a holiday before having to pay down the principal. They also allowed companies that couldn't meet interest payments to add those payments onto the principal. Those types of loans were recent innovations, said Colin Blaydon, director of Dartmouth's Center for Private Equity and Entrepreneurship. Such "covenant light" loans allowed companies to default later than they would have in years past, but when they did, they were worse off.

Debt financing also grew more complicated in recent years, as multiple layers of creditors were added, said George Singer, a corporate bankruptcy lawyer in Minneapolis. Although creditor agreements can help avoid disputes, creditors can find themselves at odds among themselves. Those first in line to collect may push for liquidation and a faster payday, while second-tier creditors, seeking to increase their chances of collecting, may want to work out new terms instead.

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