The 4th quarter of 2011 was the quarter of massive bankruptcies. A variety of economic pressures, such as decreased demand, the impact of rising commodity prices, and concern over the Euro zone contagion, became too much for even some of the biggest American companies to survive.
On October 31st, MF Global led the onslaught of bankruptcies, with the 8th largest chapter 11 filing in American history, due at least in part to bad debt decisions on European sovereign debt. American Airlines, the lone legacy airline that avoided filing within the last decade, soon followed suit, weighed down by burdensome labor and commodities costs. Due to increasing dairy prices, Friendly’s ice cream chain filed for chapter 11 bankruptcy for the second time in 4 years. Finally, Filene’s Basement, an off price retailer that has been around since 1909, filed bankruptcy at the end of 2011 and announced that it was closing all of its stores.
This year has already started with some big news. Kodak, once one of the world’s biggest name in photography, announced that it is preparing for a bankruptcy filing. Perhaps a sign of the industry, smaller retail chains, like Penn Camera Exchange, a retailer of camera supplies that has been around since 1953, filed bankruptcy in the first days of January. And, switching gears, let’s not forget that Eagle Bulk, one of the largest U.S.-based owner of Handymax dry bulk vessels, hinted to the markets last year that bankruptcy may be on the horizon in 2012.
Given the filings in the third and fourth quarters of 2011 and those suggested or made this year already, a few key industries/sectors in the American economy seem vulnerable in 2012:
- Food/Beverage/Restaurant: The Friendly’s “Chapter 22,” along with other filings, suggest a broader distressed trend in the food and restaurant industry for 2012. In particular, lower-than-predicted holiday spending, rising commodity costs, and the impending “slow dining season” that historically hits the first quarter of the New Year means the food, beverage, and restaurant space could encounter severe stress in 2012.
- Retail (specifically, apparel and photography): Much like the food/beverage/restaurant sector, America’s retail apparel and photography market is set to hit distress in 2012. Over-expansion between 2007-2009, volatile commodity prices (i.e. cotton), increased competition, and decreased demand mean retailers such as GAP and H&M could be decreasing earnings in 2012. On an even more micro level, look for boutique apparel and photography stores scattered across America’s urban landscapes to encounter even deeper distress, as local consumers figuratively tighten their belts and wallets.
- Municipalities: 2012 may also be the year we start seeing America’s municipalities and local governments hitting distress, as they find themselves forced to deal with both increasing bond and pension obligations. The dual impending pressures on America’s public markets remain the same: as tax revenues decrease, public spending obligations (i.e. pensions, etc.) increase, and a sharp increase on reliance upon government-sponsored services and offerings (as the private sector lays off more and more people) means the municipal sector may be headed for serious distress in 2012.
We will have to see whether 2012 will be a year similar to 2002, when we saw global giants such as Enron, United Airlines and WorldCom file bankruptcy. A spreading crisis in the Euro zone, volatile commodities prices, and crunching credit markets may very well combine to make 2012 an increasingly uncomfortable one for business owners, consumers, and America’s governments.