The B-word is in the headlines like never before. There were 7,843 commercial bankruptcy filings in March, according to AACER, a bankruptcy data management company. That's up 23% from the previous month and a staggering 65% from a year earlier. And the number of filings is accelerating.
"Bankruptcy typically has a lag behind what is going on in the marketplace," says Mike Bickford, the president of AACER, or Automated Access to Court Electronic Records. "So I think you are going to see increases in bankruptcy. . . at least over the next 12 to 18 months."
One potential victim: Blockbuster (BBI, news, msgs). On April 7, auditors speculated that the movie rental giant may have to declare bankruptcy before the year's end.
What company will be next to go? To find out, MSN Money took a look at credit default swaps. Swaps and other derivatives have been labeled "financial weapons of mass destruction" (by Warren Buffett himself), but they do serve legitimate purposes. Think of swaps, for instance, as a form of bankruptcy protection. Creditors that own swaps lower their risk of a debtor not paying back a loan, because a third-party insurer is on the hook for some of the unpaid debt.
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Hedge fund managers, investment bankers and others can use credit default swaps to speculate on whether a company might be seen as a riskier borrower in the future. If that happened, the price of such default insurance would increase.
Sellers of credit default swaps for radio giant Clear Channel Communications, for example, currently want nearly 62 cents to insure a dollar's worth of that company's debt. That's known as the spread. And compared with how much sellers are charging to insure other companies' debts, that's a high premium.
MSN Money compiled a list of 30 companies the market judges to be the biggest bankruptcy risks, based on the credit-default-swap spreads on their five year bonds, the most widely-traded type.
Below are 10 big-name companies that made the unfortunate cut and why the market thinks they're in danger of failing. (You can see the full list here.) Blockbuster, surprisingly, was spared from the list because there are few buyers and sellers of protection on its debt. That's partly due to Blockbuster having just refinanced a $250 million revolving loan this month that severely threatened its ability to stay in business, and partly due to the fact that the new loan comes due in just 17 months.
Six Flags
Six Flags (SIX, news, msgs), the owner of more than 20 U.S. theme parks, is scarier for investors than the Dare Devil Dive, a ride at the company's Great Adventure & Wild Safari park in New Jersey. The company has a ton of debt and seemingly not enough money coming in to pay it off by the due dates.At the end of last year, the company had about $2.1 billion in debt, according to Standard & Poor's, which cut Six Flags' credit rating last month. The company lost about $37.8 million in 2008 and $70.6 million in 2007, according to filings with the Securities and Exchange Commission.
The company also has bills coming due. Six Flags must pay holders of certain preferred income shares, known as PIERS, $287.5 million, plus $31.3 million in accrued and unpaid dividends, by Aug. 15. If Six Flags can't pay and can't refinance its debt obligations, it will be considered in default, which will trigger provisions in other loans requiring that some creditors are paid early.
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Rite Aid
Rite Aid (RAD, news, msgs) made the mistake of expanding right before a severe downturn. The drugstore chain acquired competitor Brooks Eckerd for $3.4 billion in 2007. The recession has slashed demand for everything from name-brand prescriptions to pricey anti-aging creams. Rite Aid's revenue was down nearly 2% last year, and performance was particularly bad at former Eckerd stores."What happened to Rite Aid happened to most retailers. But, unlike other retailers, we had just increased our size by more than 50% and embarked on a 16-month integration of more than 1,800 stores," Mary Sammons, Rite Aid's chairwoman, president and CEO, wrote in a March letter to shareholders.
The company posted a net loss of $1.1 billion for its fiscal 2008, which ended in March. Even worse, the company had debt of nearly $6 billion as of March 1.
Continued: Companies in debt trouble
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