Companies Set Record for Bankruptcies -
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Published on: 12/30/2002
Last Visited: 12/30/2002
"I don't think we're going to see any dip in bankruptcy filings," said Alan Feld, a bankruptcy attorney with Manatt, Phelps & Phillips in Los Angeles."I think it's going to get worse before it gets better."
BRACING FOR DOMINO EFFECT
The downfall of so many once-mighty companies has eroded investor confidence around the globe, obliterated untold shareholder wealth and led to billion-dollar write-downs by the largest U.S. banks.Financial spasms will linger for some time, experts said.
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"The biggest fallout is the difficulty caused to companies that do business with large companies in Chapter 11, whether vendors, suppliers, landlords or lenders," said Feld."The larger the Chapter 11 case, the larger the domino effect."
Reasons for the bankruptcy wave are no secret.After a dizzying run-up in stocks in the late 1990s, investors and banks showered companies with cash, betting on growth that never materialized.Debt-laden companies hit a cash crunch when the economy slowed in 2001 and banks tightened lending standards.
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"One area of the economy really suffering is the franchise business, both the restaurant and retail gasoline side," said Feld, the bankruptcy attorney, who specializes in franchise bankruptcies.Economic weakness, excess debt and competition have hurt that sector, he said.
AmeriKing Inc., one of the largest Burger King franchises with more than 350 stores, filed for bankruptcy this month, hurt by industry pressures including a price war with No. 1 fast-food chain McDonald's Corp. .
Defaults by convenience stores and service stations also have been on the rise as supermarkets and other competitors eat into their fuel and tobacco sales.
"While there may only be a handful of extremely large companies that are household names filing for Chapter 11, there's a constant volume of smaller and medium-sized companies, often with assets well in excess of $100 million, and filings of that size will very likely continue at the same pace," Feld said.
Public scrutiny could curb the worst business excesses and slow the mega-bankruptcies next year.
"People now know enough of what to look for, so the truly felonious and toxic companies have been mostly discovered," said Global Insight's Hodge.
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