Study Suggests Plenty More Bankruptcies Await

The bankruptcy of Enron late in 2001 put corporate restructurings high on the investing public's radar, and already this year, several high-profile companies have sought protection from their creditors.

Expect that to continue, if a recent report is right. A study prepared by PriceWaterhouseCoopers predicts that 200 public companies will file for bankruptcy in 2002, down 22% from the 257 filings in 2001 but well above the average of 113 filings a year from 1986 to 2000.

The increase in corporate debt and the surge in speculative-grade issues in the late 1990s leaves many companies still at risk, the report contended. "It makes over-leveraged companies that have not yet declared bankruptcy vulnerable in the modest economic rebound expected in 2002," wrote Carter Pate of PriceWaterhouseCoopers in the report.

To come up with a forecast, the accounting firm gauged the number of companies that may be in distress -- those with six consecutive quarters of earnings declines and those with gains in 2000 followed by losses in 2001. PriceWaterhouseCoopers expects to see a higher concentration of bankruptcy filings in the telecommunications, auto, steel, computer hardware, chemical and retail industries this year.

Already in 2002, Global Crossing and McLeodUSA in the telecom arena have filed for bankruptcy. Williams Communications has said it is considering such a move. National Steel (NS Quote - Cramer on NS - Stock Picks) from the steel sector and Kmart (KM Quote - Cramer on KM - Stock Picks), the big discount retail chain, have also filed.

"So many companies will fail to react to the recession in time, through inventory reductions, curtailment of credit levels, and by taking actions on staffing levels," Pate said in an interview.

In 2001, the recession and the Sept. 11 terrorist attacks helped topple companies that were already at risk of going bankrupt. As a result, the number of bankruptcies increased 46% in 2001 from the previous year -- the largest increase since 1980.

"There were a large number of poorly financed telecom and Internet companies," said Warren Agin, a bankruptcy attorney at Boston firm Swiggart & Agin. "Those industries will continue to be vulnerable."

On a somewhat positive note, PriceWaterhouseCoopers expects 100 of the 257 publicly traded companies that filed in 2001 to reorganize successfully and emerge from bankruptcy in 18 months. That estimate is based on what would be around the middle of a recent historical rate. From 1986 to 1999, between 22.1% and 70.3% of the companies that filed for bankruptcy emerged in the following year.