Newspaper article The Christian Science Monitor

'Bankrupt' No Longer Means out of Business

Newspaper article The Christian Science Monitor

'Bankrupt' No Longer Means out of Business

Article excerpt

Once upon a time, American corporations tried to avoid bankruptcy court - a sure sign of failure in a success-driven society.

Now, in a remarkable cultural shift, bankruptcy no longer means being ostracized by customers, partners, and financial backers.

Some large companies, such as those in the airline industry, have declared bankruptcy two or three times before either closing down altogether or becoming successful. Oil industry giant Texaco filed for bankruptcy, and that hardly stopped anyone from buying their gasoline.

Macy's continued to have its annual Thanksgiving Day parade, even when it was in bankruptcy.

"In the last two decades, Americans have learned to fly on airplanes, buy from retailers, eat in restaurants, and go about their lives doing business with companies in bankruptcy," says Elizabeth Warren, a professor at Harvard Law School in Cambridge, Mass. "That changes the calculus ... for a company to file in Chapter 11."

The latest high-profile company to look at the math is energy giant Enron, which teeters on the edge of bankruptcy with huge debts and the burden of high-risk deals gone awry.

But if bankruptcy has become a more common - and culturally acceptable - road to recovery in recent years, it remains a far from certain one for deeply troubled firms such as Enron.

If the Houston-based company files for bankruptcy under Chapter 11 as expected, it would try to obtain financing to continue operations under the watch of creditors, says says Ken Klee, a UCLA professor and one of the principal draftsmen of the modern bankruptcy code.

Record pace of filings

Enron is not alone. According to New Generation Research, a record 250 public companies have filed for bankruptcy so far this year. This includes such well known names as Chiquita, Bethlehem Steel, and chemical firm W.R. Grace & Co.

But in a broader sense - including private companies such as hair salons and pet stores - the statistics are not so grim. In the second quarter of this year, bankruptcy filings in US District courts stood at 40,100 companies, at a seasonally adjusted annual rate. In midst of the 1991 recession, 72,200 companies were filing for bankruptcy.

"I think corporate balance sheets are stronger than they were 10 years ago," says Mark Zandi, chief economist of the Economy.com, an economic website.

He notes that companies are currently using less of their cash flow to service their debt, and bankers have become more creative in working through problems. But often a rise in bankruptcies lags behind the economy's trajectory. "This suggests we may see a significant rise in filings, but not as high as the last recession," Mr. Zandi says.

Through the 1970s, filing for bankruptcy usually was the end of the road for a company. Trustees sold off the assets to satisfy creditors. …

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