A Rising Tide of Bamkruptcies

By Alexander L. Taylor

New worries about the huge debts that corporations have been building up

It came as no surprise, but the announcement was a shock anyway. AM International, the 58-year-old maker of office machinery, last week filed for bankruptcy. The company, once known as Addressograph-Multigraph Corp., borrowed heavily over the past several years in a hasty attempt to modernize and expand its line of office equipment. The project proved too costly, and AM International ran up debt that last week

totaled $465 million. After

losses of $245 million in 1981 and more red ink expected this year, the company realized that it was not making enough money even to pay off its loans, and Chairman Joe B. Freeman Jr. decided to call it quits.

No more than 24 hours later, Saxon Industries, another major office-equipment manufacturer (1981 sales: $715 million), said that it was going into bankruptcy. The company had also run out of money because of the high cost of financing its debt.

The failures of two of America's 500 largest industrial firms did not shake the financial markets or Wall Street. Moneymen have been expecting some corporate bankruptcies. Only two weeks ago, Commerce Secretary Malcolm Baldrige said that he would not be surprised to see one or two major companies suddenly fail. Moreover, last week's casualties are not likely to be the last during the current recession. A number of equally large firms in industries such as airlines, metals, retailing, auto supply, farm equipment and housing remain on the critical list.

The top lending officer of a big New York bank believes that at least 100 companies among the 1,000 largest American firms have "potentially serious problems." Adds Gilbert de Botton, president of Rothschild Inc. in New York: "Everybody on Wall Street expects at least one major bankruptcy before the end of the recession."

This year already looks as if it could be the worst period for business failures since 1932. As of April 8, 6,205 companies had folded, 55% more than in the same period last year and almost as many as in all of 1978.

Like a consumer who uses his credit card too often, many U.S. corporations now find themselves over their heads in debt. As sales continue to slacken and interest rates remain high, some of the largest and most successful American corporations are experiencing problems. Last week RCA Corp. was negotiating to sell its Hertz auto-rental subsidiary for about $700 million to Firestone Tire & Rubber Co. so that it could reduce its nearly $3 billion debt. Boeing saw its bond rating reduced by Standard & Poor's from AA--to A because it will have to borrow heavily in order to finance the construction of new 767 and 757 airliners. Phelps Dodge, which announced earlier this month that it is temporarily closing all of its copper mines, laid off about 3,800 of its workers and reduced salaries by as much as 8%. A somber Henry Kaufman, the Salomon Bros, economist, informed Congress last month that American business "has been devastated by the debt explosion. Our economy and financial markets are more fragile than at any time since the end of World War II."

The one development that could quickly alleviate the situation would be an end to the recession, but the economy so far indicates no signs of recovering. New figures show that in March, industrial production fell .8% and retail sales slumped .5%. Said Treasury Secretary Donald Regan: "We are in a very deep recession at this point, and the economy

is dead in the water."

Taking on debt looked like a good strategy only a few years ago. When inflation was running unrestrained in the late 1970s, companies borrowed heavily.

They expected that they would be able to finance the cost of new equipment, plant expansion or acquisitions, and pay off the loans later with cheaper dollars. From 1975 to 1981, the amount of corporate debt doubled, to $1.2 trillion. Now, however, companies are strapped for cash to finance slow-moving inventories, pay dividends and keep abreast of ever rising interest bills.

Even worse, many firms have been gambling that interest rates will soon decline by shifting their borrowing to short-term loans. Instead of paying 14% or 15% interest to borrow money for 30 years through a bond issue, they have been spending the same amount to get funds for only 90 days, and then renewing those loans every three months. Corporations have adopted such strategies because they do not want to lock themselves into paying the current interest rates for the next 30 years.

They raise this money in the commercial paper market, where corporate lOUs are generally sold in denominations of $1 million and more to major investors like insurance companies and pension funds. While the market for long-term bonds shrank 20% in the past year, the amount of commercial paper outstanding increased 32.7%, to $164 billion. That is five times what it was ten years ago. Laments Donald Woolley, chief economist of Bankers Trust: "The ratio of short-term debt to long-term debt is much too high."

The staggering cost of borrowing money at today's rates can wreck the business plan of even the shrewdest corporation. In 1980 Wickes Corp., a $2 billion San Diego lumber and furniture seller, bought Gamble-Skogmo, a struggling Minneapolis-based retailer, in an attempt to ease its dependence on the highly cyclical housing industry. Wickes executives were enthusiastic at the time, even though the deal doubled the company's debt load to nearly $2 billion. After both the housing and the retailing businesses unexpectedly went into a simultaneous slump last year, Wickes ran up huge losses that could exceed $80 million. Chairman E.L. McNeely last month resigned under pressure from the company's lenders. A new boss, Sanford Sigoloff, who specializes in reviving ailing firms, was brought in to sell off assets and pay back some of the loans.

The biggest and best-known corporate invalid in America is International Harvester Co. The farm-implement and heavy-truck manufacturer has never recovered from a bitter 172-day strike that ended in 1980. Last year the company lost $393 million, and it expects to be $518 million in the red in 1982. Early this month International Harvester told its creditors that it would soon be in technical default on $4.2 billion in loans because its net worth would drop below $1 billion. Although the lenders could push the company into bankruptcy at any time, they are not expected to take that step. Explains Eli Lustgarten, vice president and analyst at Paine Webber Mitchell Hutchins Inc.: "The banks are in just as deep as Harvester, so they will likely come up with a new agreement."

Another familiar company now in trouble is the Great Atlantic & Pacific Tea Co., once the largest supermarket chain in the U.S. It is shutting the doors on outlets at the rate of ten a month, and Chairman James Wood, 52, has promised another 400 closings, which will bring the size of the chain down to 1,200. A&P once had 3,600 stores in the U.S. The company has suffered nine successive quarters of losses.

Many observers believe that the next big corporate failure will be a commercial airline. Air carriers traditionally have a heavy debt load because of the high cost of buying new airplanes. Declining passenger loads and fare wars have produced big deficits. Western Air Lines, which is based in Los Angeles, lost $103 million during the past two years. Chairman Neil Bergt has been desperately trying to reduce costs by laying off some workers and getting others to take a 10% pay cut. Says he: "We can't continue the losses we have had." Other airlines on the endangered list are Braniff, Pan American, World Airways, Republic and Continental. Braniff last month met with its 39 major creditors to propose a make-it-or-break-it refinancing plan.

Although moneymen worry about the increasing number of bankruptcies among American businesses, they are still confident that the fall of one company will not also mean the collapse of several banks or other firms. Largely because of the unexpected Penn Central bankruptcy in 1970, the financial status of corporations is very closely watched today. In addition, a number of companies have stand-by bank credit lines that can be used if they have to withdraw from the commercial paper market.

If a major corporation does go broke, it can expect little or no help from the Reagan Administration. Even though several troubled industries, including the home builders and the savings and loan associations, are lobbying hard for Government aid, the pressures of reducing the federal deficit and the Administration's free-enterprise philosophy would surely stop any rescue programs like the $1.5 billion guaranteed loan plan that helped save Chrysler in 1979. Commerce Secretary Baldrige says bluntly: "There will not be a bailout. If you financed one industry, there'd be no stop to it, and a far more serious problem would be created for the long run." Having got itself into debt, American business will now have to get itself out. The process is likely to be long and painful. -- By Alexander L. Taylor III.

Reported by Thomas McCarroll/ Chicago and Frederick Ungeheuer/ New York

With reporting by Thomas McCarroll/Chicago, Frederick Ungeheuer/New York

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