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Bankruptcy may claim victims beyond Mirant, Loral.
Source: Reuters
Date: July 15, 2003
Author: Deepa Babington
NEW YORK, July 15 (Reuters) - The U.S. telecom and energy sector meltdown claimed two more major victims inside 24 hours, and they are unlikely to be the last big bankruptcy casualties, despite hopes that the worst may be over.
Mirant Corp. (MIR.N) late on Monday became the latest energy company to file for Chapter 11 bankruptcy protection, while satellite maker and operator Loral Space & Communications Ltd. (LOR.N) followed in its footsteps on Tuesday morning.
Though they serve very different markets - Mirant sells electricity while Loral's main focus is telecommunications and satellites - both fell victim to similar forces. Each company ran aground during the bust that followed the exuberance of the late 1990s, when many power companies turned to energy trading while telecom companies spent billions of dollars building up networks that weren't needed at the time.
Although much of the resulting wreckage has been swept away, some analysts who monitor credit quality say there is more sweeping to come. Some companies have avoided collapse only by the grace of interest rates falling to four-decade lows. But the reprieve only means that shaky players have been able to put off the day when they have to slash their debt burdens.
"Even though the refinancings have taken place and the money that is cheap has saved a lot of companies from bankruptcy, they still have to do business," said Chester Salomon, a bankruptcy lawyer and partner at Salomon Green & Ostrow. "And that's the question ... will some companies fail because they just can't meet the competition?"
In the energy sector, for example, low interest rates have given a number of struggling companies access to cheaper capital and allowed them to keep afloat by refinancing their debt. But that could simply mean delaying a default in coming years when interest rates rise, said John Bilardello, managing director of global industrial ratings at Standard & Poor's.
VOLATILE ASSET VALUATIONS
Even the improved credit market wasn't enough to save Mirant, which failed to reach a deal with its bondholders and banks to restructure its debt. And Loral finally succumbed to slack demand and excess supply triggered by the prolonged slump in the telecommunications market.
Further, though the electric utilities industry as a whole has fared better since mid-March, seven or eight companies that make up the weakest 10 percent in that group have continued their downward slide, said Tim Kasta, managing director at Moody's KMV. Mirant was at the top of that list, he said.
The value of their assets are fluctuating much more than they were five years ago, increasing the risk for lenders and making them less willing to front up new money, Kasta said.
The telecommunications sector - which has seen a parade of its best-known stars from WorldCom to Global Crossing flock to bankruptcy court - could also see several smaller players in the industry squeezed out by competition, analysts say.
In the electronic equipment sector - which includes many telecom companies, for example - Kasta estimates roughly one in 20 companies will default in the next 12 months thanks to rising debt levels and asset volatility.
To be sure, not everyone agrees that there is more gloom and doom to come.
Some, like Robert Grossman, chief credit officer at Fitch Ratings, point to positive indicators such as default rates on high yield bonds dropping sharply from 10.4 percent in the first six months of last year to 2.8 percent this year. Further, the ratio of downgrades has improved to two downgrades for every upgrade in the second quarter, compared with about four or five downgrades to one upgrade in roughly the last two years, he said.
Liquidity levels and cash flow have also improved to their best levels in the past two years as companies bend over backward to slash capital spending and conserve cash, Grossman said.
"Most of the correction has happened," said Grossman. "I don't think there will be that much more deterioration, but the improvement will be based on improving business conditions."
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