Investors Ready for 2012 Bankruptcy Bonanza
NEW YORK (TheStreet) -- Wall Street scavengers looking to pick up bankrupt U.S. companies for pennies on the dollar may begin to see their luck start to turn in 2012.
Risky companies that were able to borrow money from investors in record amounts -- and at record low rates -- over the past several years will be abruptly cut off as the European debt crisis escalates and a pile of risky debts start coming due in 2012.
Early in the financial crisis default rates among speculative borrowers spiked to nearly 15% in 2009, and many expected bankruptcies to increase. But defaults fell dramatically in 2010 and 2011 as over a trillion dollars was extended to risky companies. In the first two months of 2011, no sub-investment grade company defaulted -- through November thirty bankruptcies this year are far lower than 2010.
However, the recent defaults of MF Global, American Airlines (AMR) and General Maritime, among others signal a potentially developing bankruptcy trend.Previously refinanced bonds, along with a stock of risky buyout debt used in company takeovers are going to begin coming due in 2012, just as investors shows risk fatigue. If the trend continues, defaults will follow. Industries like media, gaming, entertainment and oil services are most vulnerable going into 2012, according to a December report from Standard & Poor's. S&P classified risky industries as having a high proportion of companies rated junk, ratings held with negative outlooks or if company bonds traded 10% above U.S. Treasury benchmarks. Within those industries, S&P ratings director Diane Vazza highlights Boyd Gaming (BYD), Orbitz Worldwide (OWW), The McClatchy Company (MNI), Dex One (DEXO), Rite Aid (RAD), Supervalu (SVU), Quicksilver Resources (KWK) and private equity owned companies such as Clear Channel Communications, Energy Future Holdings, Realogy and Caesars Entertainment as some companies that may face headwinds. Issues for companies vary, however unlike in recent years, high debt loads could become less manageable if fearful investors take cover from the over trillion dollars of risky debt that is coming due starting in 2012. With the help of investment banks issuing bonds to yield hungry bond investors, "companies have kicked the can down the road since 2008. That road is coming to an end," says Jeff Marwil a partner at law firm Proskauer and co-head of its bankruptcy and restructuring practice. Currently, $266 billion of risky high yield bonds and loans are set to come due in 2012, nearly 25% of the overall one trillion plus high yield debt market, according to calculations from Fitch.
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