Corporate Leverage Increases

According to Goldman Sachs, the level of debt on corporate balance sheets has risen to a level not seen since before 2008. With record low interest rates, companies have increasingly borrowed to fund buybacks and acquisitions. During 2014, about 10 percent of debt issues were used to fund buybacks. And, so far during 2015, about 8 percent of debt issues have been used for buybacks. Meanwhile, goodwill, which is created from mergers and acquisitions, has risen 32 percent since 2010 and more than $1 trillion in goodwill has been added to corporate balance sheets since 2008. While goodwill can represent real value, such as a brand name, it could also indicate that companies have made negative NPV acquisitions.

Skymall Flies Into Bankruptcy

Even though the ubiquitous Skymall magazine reached 650 million travelers a year in the seat back in front of you, the company was recently forced to file for bankruptcy. Skymall famously offered such products as a globe that could be opened into a liquor bar ($189) or a chess set ($212). The company suffered as airlines offered internet access and passengers began bringing smartphones and tablets, which meant they weren't forced to look in the seat back in front of them for reading material. In the bankruptcy filing, Skymall suggested an auction be held at the end of March.

A Private Bankruptcy

In a unique bankruptcy filing, GT Advanced Technologies argued that it could not reveal why it had filed for bankruptcy, nor could the company reveal its turnaround plan. GT, which is expected to be a supplier of sapphire glass for Apple, argued that confidentiality agreements prohibited the company from revealing more about the reasons for the bankruptcy. A lawyer from the Office of the U.S. Trustee, which acts as a government watchdog on bankruptcy cases, criticized GT's lack of disclosure in the case. The judge granted the request by GT on a temporary basis. Another hearing to make the ruling permanent is scheduled for October 21st.  

Changing Zs

The Altman Z-score is designed to measure the financial strength (or lack thereof) for a company. But, as corporate financing decisions have changed, so has the Z-score. Historically, a Z-score less than 1.8 indicated possible financial distress, but Edward Altman argues that now negative Z-scores indicate financial difficulty. Currently, there are are six companies in the S&P 500 with negative Z-scores. Of course, the Z-score was designed to measure the financial strength of manufacturing companies. For non-manufacturing firms, the Double Z Prime score is more appropriate

Lehman Bankruptcy Costs Rise

If Lehman Brothers hadn't already filed for bankruptcy in 2008, the company's bankruptcy costs may have forced the company to file for bankruptcy anyway. Five years after the bankruptcy filing, the costs of the Lehman bankruptcy have risen to $2.2 billion, almost three times as large as the next most expensive bankruptcy, which was Enron at $793 million. Consulting firm Alvarez & Marshall has billed $657 million in the bankruptcy, and law firm Weil, Gotschal & Manges has billed $484 million. Given that there is still about $32 billion to distribute to creditors, the cost of Lehman's bankruptcy is still rising.

Detroit Files Bankruptcy

Detroit became the largest municipality to file bankruptcy when it filed its Chapter 9 bankruptcy. The size of the city's liabilities are reported to be from $18 billion to $20 billion. Ken Orr, a bankruptcy expert hired to lead Detroit out of bankruptcy, initially made an offer of 10 cents on the dollar to creditors and less than 10 cents on the dollar to pension plans before the bankruptcy filing. Currently, 38 cents of every city dollar goes toward debt repayment and that figure was expected to rise to 65 cents by 2017. Of course, plans for the new $650 million Red Wings arena are unchanged since the funds for the arena come from a special $12.8 million per year property tax, not Detroit general funds, and $2 million per year from the Detroit Development Authority.

Case Study: Higher-Ed Textbook Publisher Cengage Files For Bankruptcy

Higher-ed publisher Cengage Learning, Inc., filed for a prepack bankruptcy yesterday. The company is the second-largest publisher of college-course material in the U.S., and it offers, among other products, books that at least attempt to compete with our favorite textbooks.

But things haven’t been going so well. For example, sales at Cengage "dis-Cengaged," dropping 18 percent for the six months prior to Dec. 31.

As is typical in a bankruptcy filing, Cengage lists creditors to whom it owes money. Two of the more notable include well-known economics textbook author Gregory Mankiw (owed $1.6 million) and finance textbook author Eugene Brigham (owed $474,000).

Jefferson County Bankruptcy

Jefferson County, Alabama, has reached an agreement in its bankruptcy to refinance much of its debt. The county's bankruptcy filing, with debt of $4.2 billion, makes it the largest municipal bankruptcy in U.S. history. JPMorgan is giving up about $842 million, or about 70 percent of the face value of the debt it held of the county's bonds. JPMorgan has been been under fire because of the way the company had refinanced the county's debt in 2002 and 2003. After the refinancing, several elected officials were sentenced to prison. The terms of the settlement also included the resolution of a lawsuit filed by the county against JPMorgan.

Hostess' Chapter 22

While bankruptcy is very often a difficult process for many companies, the second bankruptcy for Hostess this decade is definitely not a piece of cake. A recent article outlines how the original bankruptcy process looked like it would allow Hostess to move forward as a going, profitable concern. However, the recent recession coupled with Hostess' high labor costs and high leverage have forced the company back into bankruptcy court. The company pension plan is underfunded by about $2 billion and labor relations are stained. If the pension liability is eliminated by the bankruptcy court, the Teamsters Union has already had a strike by its members ratified. And while it is difficult to liquidate a Twinkie, the manufacturer of this iconic yellow treat may be headed for such a fate.