Investor Alert

Dec. 28, 2007, 12:01 a.m. EST

More Chapter 11 filings on tap for 2008

Financials, retail pain seen spreading to industrial sector

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By Laura Mandaro, MarketWatch

SAN FRANCISCO (MarketWatch) - Market analysts warn that more U.S. businesses are likely to hang "going bankrupt" signs on their doors next year as the twinned blows of slower economic growth and pricey commodities force the weakest companies to seek refuge from creditors.

In a twist from this year's trends, the pain is likely to spread from mortgage lenders, homebuilders and consumer-oriented firms - all areas that contributed to a 40% jump in bankruptcy filings in 2007 and are expected to play a role in 2008's misery.

Next year, industries at risk for the biggest increases in Chapter 11 filings include electronics makers, energy miners like coal companies and agriculture firms, according to Global Insight.

Makers of durable goods like machinery are also more at risk and will likely contribute to a 13% rise in bankruptcies in 2008, says the private research firm, which bases its estimates on issuers' credit quality and operating conditions.

Some of the reasons? "Slowing growth, particularly in the United States, increasing supply pressures, increasing production in China," lists Global Insight managing director Mark Killion.

The bond market has been placing its own bets on which companies are more in danger of squelching on their debt. These run the gamut from brokerages singed by the subprime crisis; paper and chemical companies struggling with industry downcycles; and a motley assortment of media and entertainment companies.

Online broker and bank E-Trade Financial Corp. , PVC pipe-maker Georgia Gulf Corp. and newsprint maker Bowater Inc. (now part of AbitibiBowater Inc. ) - these are some of the companies Standard & Poor's says carry debt that qualifies as "distressed" because the companies have speculative grade ratings and their bonds have been trading at least 1,000 basis points over Treasuries. That spread indicates investors want more payback for taking on higher risk.

The portion of issuers that qualify as distressed, which include Remington shavers and consumer products conglomerate Spectrum Brands Inc. /zigman2/quotes/205727759/composite SPC +0.10% , mortgage lender Residential Capital LLC and theme-park operator Six Flags Inc. /zigman2/quotes/208050417/composite SIX +0.44% , has climbed to about two-year highs. Companies that sell to the consumer make the biggest part.

On the macro front, new bankruptcy risk to makers of such goods as electronics and heavy equipment comes from an expected slowdown, or even recession, in the United States next year. For raw materials producers, say metals makers, that slowdown risk is combined with supply competition from new industrial juggernaut China.

Meanwhile rising raw material prices, from fuel to metals to grains, have raised cost pressures for makers of equipment and even some high-flying commodities producers.

"Outside of oil, whatever the ability there is to raise prices, the fact is that input prices are going up at a similar rate," said Killion.

In the past few months, General Electric Co. /zigman2/quotes/208495069/composite GE +0.19% , U.S. Steel Corp. /zigman2/quotes/200069642/composite X +2.42% , Newmont Mining Corp. /zigman2/quotes/205356474/composite NEM -0.79% and every major domestic airline have warned that rising raw material prices were cutting into profits.

The U.S. government's wholesale price index in November jumped to its highest level since 1973, as energy prices surged over 14%. Crude-oil futures have risen about 45% in the last year, coal prices have gained 32% and soybeans - the basis for many prepared food products -- are up a whopping 80%.

Meanwhile, analysts anticipate more companies in industries linked to housing will file for bankruptcy or follow the increasingly popular course of opting to sell their assets to a restructuring firm and then declare themselves out of business.

"Homebuilders will continue to be on the edge," predicted Reginald Jackson, president of the American Bankruptcy Institute and a bankruptcy attorney at Vorys, Sater, Seymour and Pease LLP in Columbus, Ohio.

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