15 Companies That Might Not Survive 2009
Who's next?
With consumers shutting their wallets and corporate revenues
plunging, the business landscape may start to resemble a graveyard in
2009. Household names like Circuit City and Linens 'n Things have
already perished. And chances are, those bankruptcies were just an
early warning sign of a much broader epidemic.Moody's Investors
Service, for instance, predicts that the default rate on corporate
bonds - which foretells bankruptcies - will be three times higher in
2009 than in 2008, and 15 times higher than in 2007. That could equate
to 25 significant bankruptcies per month.We examined ratings
from Moody's and data from other sources to develop a short list of
potential victims that ought to be familiar to most consumers. Many of
these firms are in industries directly hit by the slowdown in consumer
spending, such as retail, automotive, housing and entertainment.But
there are other common threads. Most of these firms have limited cash
for a rainy day, and a lot of debt, with large interest payments due
over the next year. In ordinary times, it might not be so hard to
refinance loans, or get new ones, to help keep the cash flowing. But in
an acute credit crunch it's a different story, and at companies where
sales are down and going lower, skittish lenders may refuse to grant
any more credit. It's a terrible time to be cash-poor.[See how Wall Street
continues to doom itself.]That's
why Moody's assigns most of these firms its lowest rating for
short-term liquidity. And all the firms on this list have long-term
debt that Moody's rates Caa or lower, which means the borrower is
considered at least a "very high" credit risk.Once a company
defaults on its debt, or fails to make a payment, the next step is
usually a Chapter 11 bankruptcy filing. Some firms continue to operate
while in Chapter 11, retaining many of their employees. Those firms
often shed debt, restructure, and emerge from bankruptcy as healthier
companies.But it takes fresh financing to do that, and with
money scarce, more bankrupt firms than usual are likely to liquidate -
like Circuit City. That's why corporate failures are likely to be a
major drag on the economy in 2009: In a liquidation, the entire
workforce often gets axed, with little or no severance. That will only
add to unemployment, which could hit 9 or even 10 percent by the end of
the year.[Want to land a plum job without paying taxes? Here's how.]It's
possible that none of the firms on this list will liquidate, or even
declare Chapter 11. Some may come up with unexpected revenue or
creative financing that helps avert bankruptcy, while others could be
purchased in whole or in part by creditors or other investors. But one
way or another, the following 15 firms will probably look a lot
different a year from now than they do today:Rite Aid.
(Ticker symbol: RAD; about 100,000 employees; 1-year stock-price
decline: 92%). This drugstore chain tried to boost its performance by
acquiring competitors Brooks and Eckerd in 2007. But there have been
some nasty side effects, like a huge debt load that makes it the most
leveraged drugstore chain in the U.S., according to Zacks Equity
Research. That big retail investment came just as megadiscounter
Wal-Mart was starting to sell prescription drugs, and consumers were
starting to cut bank on spending. Management has twice lowered its
outlook for 2009. Prognosis: Mounting losses, with no turnaround in
sight.Claire's Stores. (Privately owned; about 18,000
employees.) Leon Black's once-renowned private-equity firm, the Apollo
Group, paid $3.1 billion for this trendy teen-focused accessory store
in 2007, when buyout funds were bulging. But cash flow has been
negative for much of the past year and analysts believe Claire's is
close to defaulting on its debt. A horrible retail outlook for 2009
offers no relief, suggesting Claire's could follow Linens 'n Things -
another Apollo purchase - and declare Chapter 11, possibly shuttering
all of its 3,000-plus stores.[See 5 pieces missing from Obama's stimulus
plan.]Chrysler.
(Privately owned; about 55,000 employees). It's never a good sign when
management insists the company is not going out of business, which is
what CEO Bob Nardelli has been doing lately. Of the three Detroit
automakers, Chrysler is the most endangered, with a product portfolio
that's overreliant on gas-guzzling trucks and SUVs and almost totally
devoid of compelling small cars. A recent deal with Fiat seems dubious,
since the Italian automaker doesn't have to pony up any money, and
Chrysler desperately needs cash. The company is quickly burning through
$4 billion in government bailout money, and with car sales down 40
percent from recent peaks, Chrysler may be the weakling that can't cut
it in tough times.Dollar Thrifty Automotive Group. (DTG;
about 7,000 employees; stock down 95%). This car-rental company is a
small player compared to Enterprise, Hertz, and Avis Budget. It's also
more reliant on leisure travelers, and therefore more susceptible to a
downturn as consumers cut spending. Dollar Thrifty is also closely tied
to Chrysler, which supplies 80 percent of its fleet. Moody's predicts
that if Chrysler declares Chapter 11, Dollar Thrifty would suffer
deeply as well.Realogy Corp. (Privately owned; about
13,000 employees). It's the biggest real-estate brokerage firm in the
country, but that's a bad thing when there are double-digit declines in
both sales and prices, as there were in 2009. Realogy, which includes
the Coldwell Banker, ERA, and Sotheby's franchises, also carries a high
debt load, dating to its purchase by the Apollo Group in 2007 - the
very moment when the housing market was starting to invert from a
soaring ride into a sickening nosedive. Realogy has been trying to
refinance much of its debt, prompting lawsuits. One deal was denied by
a judge in December, reducing the firm's already tight wiggle room.[See why
"Wall Street talent" is an oxymoron.]Station Casinos.
(Privately owned, about 14,000 employees). Las Vegas has already been
creamed by a biblical real-estate bust, and now it may face the loss of
its home-grown gambling joints, too. Station - which runs 15 casinos
off the strip that cater to locals - recently failed to make a key
interest payment, which is often one of the last steps before a Chapter
11 filing. For once, the house seems likely to lose.Loehmann's Capital Corp.
(Privately owned; about 1,500 employees). This clothing chain has the
right formula for lean times, offering women's clothing at discount
prices. But the consumer pullback is hitting just about every retailer,
and Loehmann's has a lot less cash to ride out a drought than
competitors like Nordstrom Rack and TJ Maxx. If Loehmann's doesn't get
additional financing in 2009 - a dicey proposition, given skyrocketing
unemployment and plunging spending - the chain could run out of cash.Sbarro.
(Privately owned; about 5,500 employees). It's not the pizza that's the
problem. Many of this chain's 1,100 storefronts are in malls, which is
a double whammy: Traffic is down, since consumers have put away their
wallets. Sbarro can't really boost revenue by adding a breakfast or
late-night menu, like other chains have done. And competitors like
Domino's and Pizza Hut have less debt and stronger cash flow, which
could intensify pressure on Sbarro as key debt payments come due in
2009.Six Flags. (SIX; about 30,000 employees; stock down
84%). This theme-park operator has been losing money for several years,
and selling off properties to try to pay down debt and get back into
the black. But the ride may end prematurely. Moody's expects cash flow
to be negative in 2009, and if consumers aren't spending during the
peak summer season, that could imperil the company's ability to pay
debts coming due later this year and in 2010.Blockbuster.
(BBI; about 60,000 employees; stock down 57%). The video-rental chain
has burned cash while trying to figure out how to maximize fees without
alienating customers. Its operating income has started to improve just
as consumers are cutting back, even on movies. Video stores in general
are under pressure as they compete with cable and Internet operators
offering the same titles. A key test of Blockbuster's viability will
come when two credit lines expire in August. One possible outcome,
according to Valueline, is that investors take the company private and
then go public again when market conditions are better.Krispy Kreme.
(KKD; about 4,000 employees; stock down 50%). The donuts might be good,
but Krispy Kreme overestimated Americans' appetite - and that's saying
something. This chain overexpanded during the donut heyday of the 1990s
- taking on a lot of debt - and now requires high volumes to meet
expenses and interest payments. The company has cut costs and closed
underperforming stores, but still hasn't earned an operating profit in
three years. And now that consumers are cutting back on everything,
such improvements may fail to offset top-line declines, leading Krispy
Kreme to seek some kind of relief from lenders over the next year.Landry's
Restaurants.
(LNY; about 17,000 employees; stock down 66%). This restaurant chain,
which operates Chart House, Rainforest Café, and other eateries, needs
$400 million in new financing to finalize a buyout deal dating to last
June. If lenders come through, the company should have enough cash to
ride out the recession. But at least two banks have already balked,
leading to downgrades of the company's debt and the prospect of a
cash-flow crunch.Sirius Satellite Radio. (SIRI - parent
company; about 1,000 employees; stock down 96%). The music rocks, but
satellite radio has yet to be profitable, and huge contracts for
performers like Howard Stern are looking unsustainable. Sirius is one
of two satellite-radio services owned by parent company Sirius XM,
which was formed when Sirius and XM merged last year. So far, the
merger hasn't generated the savings needed to make the company
profitable, and Moody's thinks there's a "high likelihood" that Sirius
will fail to repay or refinance its debt in 2009. One outcome could be
a takeover, at distressed prices, by other firms active in the
satellite business.Trump Entertainment Resorts Holdings.
(TRMP; about 9,500 employees; stock down 94%). The casino company made
famous by The Donald has received several extensions on interest
payments, while it tries to sell at least one of its Atlantic City
properties and pay down a stack of debt. But with casino buyers scarce,
competition circling, and gamblers nursing their losses from the
recession, Trump Entertainment may face long odds of skirting
bankruptcy.BearingPoint. (BGPT; about 16,000 employees;
stock down 21%). This Virginia-based consulting firm, spun out of KPMG
in 2001, is struggling to solve its own operating problems. The firm
has consistently lost money, revenue has been falling, and management
stopped issuing earnings guidance in 2008. Stable government contracts
generate about 30 percent of the firm's business, but the firm may sell
other divisions to help pay off debt. With a key interest payment due
in April, management needs to hustle - or devise its own exit strategy.
