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Tuesday, November 22nd, 2011

American’s Airlines Parent Company Closer to Bankruptcy?

Bloomberg Businessweek reports this week that American Airlines’ parent company, AMR, may be edging closer to a bankruptcy filing. The assessment came on the day of AMR’s final board meeting of 2011, an occasion on which members were forced to acknowledge four consecutive years of losses.

Of the problems plaguing American Airlines, perhaps the most prominent is its high labor costs. At present, AMR has not been able to renegotiate its contract with pilots; the Allied Pilot Association has apparently not yet voted on a contract proposed by the airline.

While spokespeople from AMR have reported that bankruptcy is neither the company’s first choice nor its preference, indicators suggest that it might be inevitable if circumstances don’t significantly change in the next few months.

To date, AMR has access to $4.3 billion in cash and available investments. The total may sound like a lot, but considering the size of American Airlines and the cost of its day-to-day operations, many analysts are predicting that the pile won’t last much beyond six to nine months.

In fact, one ratings analyst recently cut the airline’s stock rating from “buy” to “neutral.”

Even if American manages to sort out its labor difficulties, the airline could face turbulent times ahead: it seems that competitors (including United Continental Holdings Inc. and Delta Air Lines Inc.) have already outpaced AA in passenger traffic. Any cost-cutting measure, then, would need to be accompanied by a plan for increasing revenues and wooing back fliers.

Debt Protection Costs Rising

Another indicator of rocky times ahead? The cost of insuring AMR’s debt against default for the next five years rose to its highest level since 2008. In essence, this means that:

  • Insurers are less confident that AMR will have the means to repay its debt in the coming years. These insiders base their evaluations on various financial indicators within the company.
  • AMR is running out of debt-fighting options. If it is unable to strike a labor agreement with pilots, AMR will be very limited in its ability to cut meaningful amounts of debt. This signals investors that a default may be on the horizon.
  • AMR could start seeing a spiral effect. As one measure of its economic viability weakens, others could follow, pulling the company into bankruptcy.

Of course, bankruptcy is not a sure thing at this point. And even if AMR does end up reorganizing under Chapter 11, it could reemerge stronger. In recent years, a number of airlines have successfully remade themselves with the help of the bankruptcy court.

In fact, many analysts suggest that if American had reorganized under bankruptcy when other airlines were doing so, it likely wouldn’t be in such dire financial straits right now.

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Wednesday, November 16th, 2011

Ally Bank Considering Bankruptcy for Its Mortgage Lending Unit

Ally Bank, a unit of Ally Financial (which used to go by the name GMAC) is considering putting its struggling mortgage unit, ResCap, through bankruptcy to alleviate some of that division’s debts, according to the Christian Science Monitor.

Apparently, ResCap has not done well financially during the last two quarters, losing more than half a billion dollars. On top of its recent sub-par performance, the mortgage unit also reportedly has some serious debt coming due – about $2.3 billion between now and the end of 2013. That figure comes to about four times the mortgage company’s total reserves as of the end of September.

How Does Partial Bankruptcy Work?

So what does it mean that Ally is considering bankruptcy for just its mortgage division? Here’s a summary:

  • The bank itself wouldn’t go into bankruptcy protection. Many large corporations separate their business operations into discreet arms so that they can manipulate them individually. In the case of financial difficulty, for example, a business might be able to put one part of itself through bankruptcy without greatly affecting its other parts. Think of it as amputating an arm to save a life.
  • Despite official separation, the bank could face fallout. Some analysts think that a ResCap bankruptcy is unlikely specifically because of the effect it might have on Ally’s reputation. Even if the larger company were not financially hurt by the mortgage division’s bankruptcy, consumers and investors might start to question its viability and shy away from investments.
  • It can choose between liquidation and reorganization. Depending on its needs, Ally could put ResCap through a liquidation bankruptcy that would terminate the mortgage arm’s operations or choose to reorganize the group’s debts and emerge as a (hopefully) stronger business.

A History of Bailouts?

As of now, the potential bankruptcy of ResCap is still very much in its speculative stages. While Ally may be considering liquidation or debt reorganization, it is likely also considering a number of other options.

But some analysts are pointing to Ally’s past as evidence that it might be likely to choose bankruptcy in the future. Ally officially became a bank in 2008 in order to take advantage of bailout money that was made available to banks at that time. Prior to its conversion, it operated as GMAC, the financing firm of General Motors.

The Federal Reserve Board approved its request to become a bank, Ally collected bailout money, and the firm now operates as Ally Financial. The new company offers a number of investment and savings products, emphasizing transparency and simplicity.

Earlier Mortgage-Division Bankruptcy Considerations

Earlier this year, Bank of America (the nation’s largest bank) considered a similar move for Countrywide, a mortgage division it bought during the financial upheaval. Countrywide specialized in subprime mortgage loans and, as borrowers defaulted in droves, quickly accumulated scads of debt.

As of now, though, Bank of America has opted to avoid a Countrywide bankruptcy filing. Ally may well file suit.

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Friday, October 21st, 2011

Tough Economy Pushing More Businesses into Bankruptcy?

A recent report from Reuters.com highlights a growing trend of business bankruptcy filings in the U.S. While personal bankruptcy filings have actually decreased in recent months, some lawyers are predicting that 2012 through 2014 will see upticks in business bankruptcy reorganizations.

Some lawyers, it seems, have already reported an increase in clients.

A Double-Dip Recession?

One factor some analysts are watching is the U.S. economy’s ultimate move toward or away from a double-dip recession. First, a quick look at where the economy is now: though unemployment remains high and the housing market has still not recovered from the rash of foreclosures that touched off the Great Recession, the U.S. is technically not in a recession right now – probably.

A recession only occurs when the country’s gross domestic product (GDP) recedes, or shrinks over successive quarters. In other words, when there is a decrease from one measurement period to the next, the country is in a technical recession.

The problem is, there’s no way of determining whether an economy is in a recession until after the fact – that is, we can’t measure this month’s data until next month.

Recessions & Business Bankruptcies

During economic recessions, bankruptcy filings tend to rise. That’s led some insiders to point at recent numbers reported on BankruptcyData.com:

  • Ten companies worth $100 million or more filed for bankruptcy in September of this year. The $100 million mark is often considered the threshold for a “large” company.
  • September had the highest rate of business bankruptcies since April, when 17 large companies filed.
  • Business bankruptcy filing rates have not been so high since 2009, when the country was in the thick of the recession.

Still, business bankruptcy numbers alone cannot establish the presence or absence of recessionary conditions. But businesses do tend to need bankruptcy protection more often when the economy is receding than when it is growing.

In 2008, for example, the beginning of the recession touched off the United States’ biggest bankruptcy ever. Lehman Brothers, a company worth $639 billion, filed for bankruptcy protection and caused a number of financial ripples for its customers - and the global economy.

On the other hand, a recession alone will not automatically trigger a business to file for bankruptcy. Banks’ willingness to lend money, consumers’ behavior, and developments in foreign markets could all impact future business bankruptcies in the U.S.

And often (as the airline companies have demonstrated), filing for bankruptcy can let a business restructure to emerge as a stronger entity than it was before. That’s because in bankruptcy court, businesses can eliminate debt, renegotiate costly labor contracts, modify lease agreements and otherwise take important steps to ease their financial burdens.

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Tuesday, September 27th, 2011

Digital Certificate Provider Files for Bankruptcy after Hack

DigiNotar, a Dutch company that provided digital authentication certificates for Dutch government-owned Internet domains, has filed for bankruptcy after a serious hacking incident led to a significant security breach. Wired.com reports that DigiNotar, which is owned by Vasco Data Security (an Illinois company) was hacked in June because of insufficient security.

The hacker, according to reports:

  • Obtained more than 500 fake digital certificates for major web sites (including Google, Skype and Mozilla); and
  • Could use those certificates to collect users’ sensitive information when they entered it onto what they thought were secure sites.

Shortly after the breach was announced, the Dutch government reportedly stopped using DigiNotar’s services. When Vasco Data Security announced DigiNotar’s bankruptcy, it apparently made explicit its plans to maintain its own high security levels and to cooperate with the bankruptcy trustee and judge as necessary.

Digital Privacy & Identity Theft

The world of online identity protection relies on a system of encryption and authentication that, if hacked, can allow unauthorized individuals or groups to access sensitive information. When a hacker obtains false security certificates (as happened with DigiNotar), that hacker could access users’ accounts and even read their communications.

One of the main reasons that this hacking incident led to DigiNotar’s bankruptcy is that the company had failed to take adequate steps to protect itself from potential hackers. Apparently:

  • The hack occurred in early June but the company was not aware of it until mid-July, when an independent company conducted an audit of its security features;
  • DigiNotar’s system did not include strong passwords, anti-virus protection or updated software patches;
  • DigiNotar did not admit to the breach until August, when Iranian Gmail users reported difficulty accessing their email. At that time, Google confirmed that a fraudulent certificate was available and possibly being used to offer a fake Gmail page.

After reports of the incident surfaced, an Iranian man in his early 20s reportedly identified himself as a hacker and noted that his actions were an act of political retaliation for events that occurred during the Bosnian war in 1995.

The hacker may have allowed Iranian government officials to access citizens’ Gmail accounts, thus possibly providing them with a means of spying on dissidents. In other contexts, similar hacking feats could translate to other types of identity theft.

Major Blow to Legitimacy

After the incident played out, Google, Mozilla and other major web sites announced that they would no longer accept authentication certificates issued by DigiNotar, as they no longer trusted the company to adequately protect itself from hackers.

The bankruptcy filing will likely allow Vasco Data Security to maintain its operations without significant interruption.

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Wednesday, August 31st, 2011

Statistics Show Decrease in Small Business Bankruptcies

The latest numbers from Equifax, a credit rating organization based in Atlanta, Georgia, show that small business bankruptcy filings decreased in the first quarter of 2011 compared to the same period in 2010. Down 15 percent from last year, the first-quarter small business filings were still higher than those in the first quarter of 2008, before the recession hit.

For the purposes of its statistics, Equifax considers a small business any corporation with 100 employees or fewer. Here’s a look at what these numbers might mean for the larger economy.

Small-Business Bankruptcy & Economic Recovery

Small business bankruptcy filings might affect the economy in a number of ways:

  • Jobs: When small businesses file for Chapter 7 bankruptcy, they liquidate and cease to exist. That means that any employees of that business become unemployed and enter the job market. A Chapter 11 bankruptcy means reorganization for a small business, but some employees could still be made redundant, especially in smaller operations where salaries are among the largest expenses business owners have. While it might not seem like a small business could have a big impact on the unemployment rate, consider this: about 38 million Americans work for companies with fewer than 100 employees.
  • Local economies: In many parts of the country, small businesses give a town its individual “flavor.” Liquidation bankruptcy by these businesses might hurt a local economy by removing a draw for tourists or out-of-towners; however, a successful reorganization could mean more-booming business in the future.
  • Real estate: In an admittedly less direct way, small-business bankruptcies could affect a place’s real estate market. Empty storefronts drive down real estate prices. This can be good if other businesses fill in right away, but could be bad if multiple businesses close down in the same area. Similarly, if an area’s businesses are failing and its residents are losing work, they may move to greener pastures, leaving their houses empty and potentially driving down residential real estate prices, as well. If few businesses exist to attract potential buyers, the problem could persist.

The Cycle of Small-Business Bankruptcy

One of the most difficult parts of a slow economy is its potential to lead to unhealthy economic cycles: when people are worried about jobs and money, they tend to save more and spend less (and, in fact, numbers have shown that the U.S. savings rate is much higher now than it was pre-recession).

When people aren’t spending money, though, the economy has a hard time getting started (as much as two-thirds of the U.S. GDP is made up of consumer spending). Small businesses, which have shallower reserves of cash, may not be able to attract the customers they need to stay afloat.

When local businesses fail, more people lose jobs and fight to save money, knowing they’ll need it if they cannot find work right away.

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Posted in Economic News: How Are We Doing? | 5 Comments »

Thursday, January 7th, 2010

Business Chapter 11 Bankruptcy Filings Up 50 Percent

Business bankruptcy filings are increasing at an even faster pace than the record-setting personal bankruptcy numbers from 2009.

Last year, Chapter 11 business bankruptcy filings increased 50 percent from 2008, according to a Business Week report.

Bankruptcy information, trends and statistics for this year

In all, more than 15,000 business decided to file Chapter 11 bankruptcy. Of these filings, some reorganized an remained in business, some were sold, and others sold their assets and closed shop completely.

But some businesses filed a Chapter 7 bankruptcy, which results in a liquidation of assets. Combined Chapter 7 and 11 filings resulted in a 38 percent increase in business filings for 2009.

The total comes to 89,402 businesses filing bankruptcy in 2009, reports the Wall Street Journal. That's almost 25,000 more business than needed help the previous year.

And, despite some signals that the economy is getting, business bankruptcy filings continued to pick up steam as the year went on. Business filings in December rose 3 percent compared with November, and were 13 percent higher than the same month for the previous year.

Among those business filing bankruptcy were 207 publicly traded companies.  That's the third-highest total since 1980. And these companies also include some of the biggest and richest in the country, holding around $600 million in assets at the time of their bankruptcy filing.

That number is the second most of all time, just behind 2008's monstrous year which included the massive Lehman Brothers bankruptcy.

During the first decade of the 2000s, more than 400,000 businesses will have filed for bankruptcy protection, according to numbers from the American Bankruptcy Institute.

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Wednesday, December 30th, 2009

The Biggest Business Bankruptcy Filings of the Decade

This was a banner decade for big bankruptcy.

Of the 20 largest corporate bankruptcy filings in history, all but three of them occurred in the last decade.

The 2000s featured three businesses with more than $100 billion in assets. All the companies in the list here held more than $30 billion in assets.

Combined size of the biggest companies filing bankruptcy this decade: $1.5 trillion. That would make them the 10th richest country in the world with a greater GDP than Canada, India, Mexico, Australia and most of Europe.

The Biggest Business Bankruptcies of Decade

Pacific Gas and Electric: $36.1 billion
April 2001
The story: After California deregulated the state’s energy industry, the state entered an energy crisis as companies couldn’t sell energy for more than they paid for it. Pacific Gas and Electric began taking on debt as Californians experienced rolling blackouts across the state. The company was bailed out by the state government, which provided cash for the company during its reorganization. While this move saved the company, it did add to the long list of budget problems still plaguing the state.

Enron: $65.5 billion
December 2001
The story: At one time Enron was one of the world’s leading energy companies, a blue-chip stock, and regularly lauded by the business world. But all of that began to unravel in the late 1990s as a massive accounting fraud and insider trading scandal was unveiled. Enron had been hiding losses in offshore companies for years, and falsely inflating their stock. When this knowledge became public, the company was forced to file what was then the largest bankruptcy filing in history.

WorldCom: $107 billion
July 2002
The story: In 2002, WorldCom was the second largest long distance phone company, but nearly $4 billion in billing fraud led to what was then the largest bankruptcy in US history. Following bankruptcy, the company changed its name to MCI and was later purchased by Verizon in 2005.

Conseco: $61.4 billion
December 2002
The story: A large insurance company based in Indiana, Conseco launched a financial arm of the company in the late 1990s with the purchase of a leader in the mobile home financing industry. The move proved costly, and led to bankruptcy reorganization early this decade. The plan worked in the short-term, and Conseco emerged ready to do business again, although late this year new financial concerns may be appearing.

Lehman Brothers: $691 billion
September 2008
The story: The Lehman Brothers bankruptcy filing is far and away the largest by an American corporation in history. Founded more than 150 year ago, it eventually grew into the third largest brokerage firm in the country, and the largest mortgage underwriter. The firm made a fortune during the housing boom earlier this decade, but was at the center of the subprime mortgage collapse. After a frantic search for buyers that turned up empty, and no help from the US government, Lehman collapsed. The company has continued to be in the news as bonus paychecks for executives at the firm have triggered outrage and scrutiny.

Washington Mutual: $327.0 billion
September 2008
The story: Another victim subprime mortgage victim in September of 2008, WaMu burst as quickly as the housing bubble that helped it grow into one of the largest banks in the country. But after the Lehman Brothers collapse, customers made massive withdrawals at WaMu for fears it would soon fold, too. The government quickly took over, and forced a sale to JP Morgan Chase, marking WaMu’s fate as the largest bank failure ever in the US.

Chrysler: $39.3 billion
April 2009
The story: Though not the first car company hit by weak sales and high loses, Chrysler was the first American automaker to file bankruptcy since Studebaker in 1933. The company was reorganized through bankruptcy and government invervention that led part of the company to be acquired by the United Auto Workers Union and another portion to be sold to Italian company Fiat.

Thornburg Mortgage: $36.56 billion
May 2009
The story: Thornburg specialized in “jumbo” adjustable rate mortgages: Those worth more than $400,000. But, as the value of these mortgages fell along with mortgage values across the board in the middle part of this decade, Thornburg was one of many mortgage companies with a bankruptcy case in the $30 billion range. Although the company officially entered Chapter 11, it sold its assets and was officially closed.

General Motors Corporation: $91 billion
June 2009
The story: The beleaguered car company was forced into bankruptcy earlier this year as the federal government poured in billions of dollars to keep the company afloat. The auto-maker’s executives had asked the government for financial help and declared they were close to insolvency. But in exchange for financial support, the feds wanted GM to be reorganized in Chapter 11. The bankruptcy led to the closing of brands Saturn and Pontiac; Hummer was sold to a Chinese company; and the future of Saab is still up in the air.

CIT Group: $71 billion
November 2009
The story: CIT Group is one of the largest commercial lenders in the country, specializing in loans to small and mid-size businesses. But they lost $3 billion over two years, and continued to struggle despite receiving billions in cash and loans from the federal government and other lenders. Despite plans to emerge quickly, their bankruptcy raises questions on how small businesses, including 2,000 vendors supplying goods to 300,000 stores, will be affected.

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Monday, November 30th, 2009

Bankruptcy Filings Rise 33 Percent in Third Quarter

The number of bankruptcy filings in the third quarter of 2009 reached their highest point since 2005, and soared 33% above the total from the previous year, according to statistics from the American Bankruptcy Institute.

Consumer and business bankruptcies filed between August and October reached 388,485 compared to 292,291 for Q3 2008. Total filings between January and October, 2009, reached 1,100,035 compared to 841,496 in the same period in 2008, and close to the total 1,117,771 bankruptcies filed in 2008.

October saw the most personal bankruptcy filings since October, 2005, when more than 600,000 consumers filed to meet the deadline before the new bankruptcy law took effect.

"The spike in bankruptcy filings for both consumers and businesses reflect the continuing effects of today's weak economy," said Samuel Gerdano, ABI executive director.

"With unemployment surpassing 10% and credit to businesses remaining tight, consumers and businesses are increasingly turning to the financial relief of bankruptcy."

Bankruptcy filings are expected to exceed 1.4 million in 2009.

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Wednesday, November 18th, 2009

New Bankruptcy Chapter Proposed by Congress

A new amendment to the U.S. bankruptcy code could help troubled financial institutions reorganize their debts more effectively and eliminate the status of "too big to fail" that has prompted government intervention over the past two years.

H.R. 3310, introduced by Rep. Spencer Bachus (R-AL), is called the Consumer Protection and Regulatory Enhancement Act, and would create a Chapter 14 bankruptcy under which institutions to file bankruptcy without disrupting the nation's financial stability.

The bill is in response to the government's inconsistent reaction to the collapses of financial holding companies such as Lehman Brothers, Bear Stearns and AIG.

At the American Bankruptcy Institute's 2009 Legal Symposium in Washington, D.C., this week, Congressional staffer Daniel Flores spoke on a panel about the need for the new chapter, according to Reuters.

"No one trusts the bankruptcy bar and the courts. That's the problem," said Flores. "We don't need to abandon bankruptcy, we need to abandon government intervention that can seem inconsistent and panicky."

Most importantly for taxpayers, he bill would completely remove the option for government bailouts, leaving troubled businesses with no other safety net besides bankruptcy.

Rep. Bachus' bill, which is currently under committee consideration, would have no effect on consumer bankruptcy laws.

If passed it would be the first amendment to U.S. bankruptcy laws since the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005.

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Tuesday, November 3rd, 2009

Commercial Bankruptcy Filings Jump 7% in October

On the heels of bad news for small businesses with the bankruptcy of CIT Group Inc. comes news from The Wall Street Journal that business bankruptcy filings rose 7% in October, after falling for several consecutive months.

A total 7,771 businesses filed for bankruptcy protection in October, up from the 7,271  in September. The increase continues a yearly trend of rising bankruptcies from the same time last year, despite what had been a drop in filings from month-to-month in August and September.

A report from the business information company Equifax Inc. suggests that, from the third quarter of 2008 to the third quarter of 2009, commercial bankruptcy filings among small businesses increased by 44%.

The Wall Street Journal cites the same tight credit market and decreases in consumer demand for products fueling the wider recession as continued causes for businesses going into bankruptcy.

Retail, Real Estate Hardest Hit

Retail businesses and real estate are the industries that continue to lead in bankruptcy filings. The impact of flagging success in these areas, however, can lead to a trickle-down effect with a much broader reach and negative financial impact on industries like home building and manufacturing, according to Georgia State University College of Law bankruptcy professor Jack Williams, who spoke to WSJ.

Bankruptcy filings are a lagging economic indicator so it's likely that we'll see bankruptcy filings increase for the next several quarters, Williams told the journal.

The bankruptcy of CIT Group Inc., one of the largest lenders to small- and medium-sized businesses, will only serve to tighten credit markets, many believe, in an already troubling environment for small businesses. CIT finances a wide array of businesses, from retail operations like Dunkin' Donuts store operators, to energy companies.

In a positive turn, the Equifax report did note that bankruptcy rates seem to be improving in some metropolitan areas like Charlotte, North Carolina, New York-White Plains, and Atlanta, also indicating that the East Coast may be experiencing an earlier recovery from the recession than the West Coast.

According to the report, California continues to be the state hit hardest with bankruptcy filings, with eight of the top 15 metro areas in terms of bankruptcy filings.

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