Is Chapter 11 the new business fad?
It's a legitimate question: In this dire economy, where the stigma of bankruptcy is fading fast, should more companies think about the benefits of taking the Chapter 11 plunge?
Think of it as capitalism's second chance. It's certainly on the minds of GM, Chrysler and Ford, especially if the feds do not come up with bailout money soon.
On Monday, electronics retailer Circuit City opted for Chapter 11 to give it breathing room from lenders owed $898-million. Chapter 11 protects companies from creditors, allows time to reorganize and, hopefully, re-emerge. Most often, businesses continue to operate — as Circuit City will to take advantage of the holiday shopping season. Weak as sales forecasts may be, now is the time of year when retailers do the bulk of their business.
Circuit City said it was afraid that without Chapter 11 protection it could not get the electronics inventory shipped to its stores in time for Black Friday — the shopping spree that occurs the day after Thanksgiving.
Also on Monday, a Tampa business sought the Chapter 11 umbrella. Accentia Biopharmaceuticals, whose stock was bounced off the Nasdaq market earlier this month for failing to meet a minimum market value, says it plans to "significantly decrease operating expenses" and "focus cash and resources on drug development" to attract outside investors again.
The Chapter 11 club used to be of modest size. Now it's one of the few things growing in this down economy.
The American Bankruptcy Institute predicts a total of 1-million to 1.2-million bankruptcy filings in 2008, a 30 percent increase from 2007.
"This is, in essence, kind of the cleansing cycle. It's the tail of financial distress," says Jack Williams, the American Bankruptcy Institute's resident scholar.
Look who's recently landed in Chapter 11:
• Clearwater's Evatone Inc., a maker of CDs and DVDs. Why? A dispute with its headquarters' landlord.
• Bill Heard, the nation's largest Chevy dealership. Why? A credit crunch and poor Chevrolet sales.
• Homebuilders Tousa Inc. of Hollywood, Fla., and Bonita Springs-based WCI Communities Inc. Why? A glut of housing, falling prices.
• Airlines ATA, Aloha Air and Alitalia. Why? High fuel prices and declining demand.
• Retailers Mervyn's, Steve & Barry and Linens 'n Things. Why? Weak sales.
• The Treasure Island Tennis and Yacht Club and the Colony Beach & Tennis Club Association, a homeowners group on Longboat Key. Why? Tighter consumer budgets.
• Tampa alternative newspaper business Creative Loafing. Why? Overexpansion.
• Vicorp Restaurants, which owns the Village Inn chain, and Metromedia Steakhouses, which controls the Ponderosa and Bonanza steakhouse brands. Why? Consumers retreating from dining out.
So what happens when the impact is felt of the Wall Street and banking crisis, which pushed Lehman Brothers and Washington Mutual into bankruptcy?
Most bankruptcy filings from that mess won't start rising dramatically until the second quarter of 2009, says American Bankruptcy Institute's Williams.
"Bankruptcy filing rate is a lagging economic indicator," he says. "It's usually about three quarters behind bad news."
Robert Trigaux can be reached at [email protected]