Bankruptcies of Large U.S. Companies to Extend into 2010, According to New Bain Study

NEW YORK--(BUSINESS WIRE)--The aftershocks of the current recession are likely to be felt well into 2010, according to a study released today by Bain Corporate Renewal Group (Bain CRG), a subsidiary of Bain & Company, the global business consulting firm. The Bain CRG Fall 2008 Default Outlook finds that bankruptcies of U.S. companies with $100 million or more in assets will approach 100 in 2010. The estimate is based on an analysis of macroeconomic trends including a projected default rate of 7-9% of corporate issuers of speculative debt (rated B or lower) and a $500 billion shift away from consumer spending to consumer savings. Large company bankruptcies currently are tracking to be in the 50-75 range in 2008, which is in line with the Bain CRG Spring 2008 outlook. The study estimates bankruptcies next year to surge into the 95-120 range, an upward forecast from the spring based on the recent economic downward forecasts for the economy.

“The body blows to industry supply chains will keep on coming into 2010”

“The body blows to industry supply chains will keep on coming into 2010,” said Sam Rovit, author of the study and managing partner for Bain CRG. “Because of the lag time between macroeconomic factors and defaults, our study finds that a painful business shockwave will extend further into the future than originally thought.”

Two underlying factors extending corporate defaults and bankruptcies through 2010 are: (a) an approximately $500 billion reallocation of consumer expenditures to savings to rebuild lost wealth, and (b) a $200 billion decrease in debt servicing. The combined effect is ‘peak to trough’ contraction of $300 billion in gross domestic product (GDP), or approximately a 1-2% reduction in GDP, according to the study. The diversion of consumer expenditures and historically high interest rate spreads place retail and other consumer-cyclical sectors highest on the endangered species list. Most at risk are companies in media & entertainment, retail, restaurants, consumer non-durable goods and chemicals.

Based on the results of the study, Bain CRG is advising companies with strong balance sheets to rein in spending and gradually begin to acquire assets to improve their competitive position. The risk for these companies will be buying too early. “Most companies would be advised to sit on the sidelines for the time being because heavy weather is here for a while and asset values will continue to drop,” said Rovit. Companies with weak balance sheets are most at risk. Those with strong competitive positions should be aggressively cutting costs, divesting non-core assets, building cash and protecting liquidity. The study warns that companies with weak balance sheets and weak competitive positions are not likely to survive the current downturn unless drastic actions are taken to restructure the business.

Editor’s note: To arrange an interview with Sam Rovit or to receive a copy of the Bain CRG Fall Default Outlook, please contact Cheryl Krauss at email: cheryl.krauss@bain.com or 646-562-7863 or Frank Pinto at email: frank.pinto@bain.com or 917-309-1065.

About Bain Corporate Renewal Group (Bain CRG)

Bain CRG provides integrated, rapid turnaround services and unites Bain’s heritage of turnaround work, deep industry, operations and strategic expertise, with financial restructuring capabilities. It brings together three market-differentiating capabilities to preserve shareholder equity:

• Financial and restructuring professionals experienced in cash modeling, cash management and creditor negotiations
• Senior partners with both consulting and line management experience who can take on interim CEO, CFO and CRO roles
• Access to the breadth and depth of Bain’s global industry, operational and strategic expertise

Bain CRG is differentiated in its ability to deliver in-depth turnaround expertise and provide interim CEO/CFO/CRO leadership to drive a financial and operational turnaround. For more information visit: http://www.baincrg.com

About Bain & Company, Inc.

Bain & Company, a leading global business consulting firm, serves clients on issues of strategy, operations, technology, organization and mergers and acquisitions. The firm was founded in 1973 on the principle that Bain consultants must measure their success by their clients' financial results. Bain clients have outperformed the stock market 4 to 1. With 39 offices in 26 countries, Bain has worked with over 3,900 major multinational, private equity and other corporations across every economic sector. For more information visit: www.bain.com.