Interest Rate Roundup

Friday, April 11, 2008

Corporate bankruptcies starting to hit the tape

Slowly but surely, we're seeing the economic slowdown and higher debt loads catch up to corporate America. The Wall Street Journal is reporting this morning that home furnishings retailer Linens 'n Things could file Chapter 11 in the next few days. The company has roughly 590 stores and 17,000 employees. Here are some more details:

"Linens would be one of the largest buyouts to go bust since the credit crisis took hold last summer. In February 2006, Apollo Management LP acquired Linens for $1.3 billion. The housing crisis made the home-furnishings space ultracompetitive, and the debt on the company's balance sheet gave it diminished flexibility to ride out the downturn.

"In a recent letter to investors, Apollo founder Leon Black acknowledged that the company was troubled, explaining that while it had made operational improvements, its financial results "remain challenged." Apollo filed to go public in a share offering this week."

It's worth noting that during the recent private equity/LBO mania, several deals were done at excessive valuation ratios and with very high levels of leverage. So it's unlikely LNT will be the only bankruptcy.

Meanwhile, airlines continue to drop like flies. Discount carrier Frontier Airlines Holdings just filed for Chapter 11 protection today, making it the fourth company to do so in a matter of weeks (the others were Skybus, Aloha, and ATA). For the credit markets, rising corporate bankruptcies could be another significant challenge -- bad news considering consumer loan losses and mortgage foreclosures are through the roof.


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