What kinds of businesses go bankrupt these days?
There’s news out today of a couple of big companies filing for bankruptcy, including the largest private U.S. envelope maker, known as National Envelope, and a company that makes batteries, Exide Technologies.
Overall, though, business bankruptcies are actually way down right now, in part thanks to record low interest rates on loans. Companies facing big debts can often avoid bankruptcy by borrowing their way out of trouble. So for those companies that are still going bankrupt, we had to ask: Why?
David Skeel teaches bankruptcy law at University of Pennsylvania. Skeel’s self-proclaimed goal in life is to “persuade people that bankruptcy is actually incredibly interesting.”
(He is aware that so far relatively few humans share this view though. “We’re still small, but we’re growing,” he told me of the bankruptcy-is-actually-interesting camp.)
Part of what makes bankruptcy so interesting, Skeel says, is that it’s about failing. Who doesn’t like watching that? (See: the popularity of American Idol in general, especially moments like this one.)
The failure has to be pretty whopping when it comes to larger companies that have been around for a while, but are now filing for Chapter 11, says Skeel.
“With a big established firm it’s not hard to get funding right now, and so you’re not likely to end up in bankruptcy unless you’ve got real problems with your business,” he says. Problems that “make lenders skeptical.”
In some cases, the problem can be with a particular company that has taken a wrong turn, like making a gamble on a new technology that either isn’t the right technology, or is ahead of its time. That’s what happened to a lot of companies in the fiber-optic industry in the early 2000s.
In other cases, it’s the whole industry that’s got problems, says Skeel. Like Kodak and film, or that envelope maker. How many envelopes have you dropped in the mail box lately?
Then there’s the solar industry. It’s also seen a boom in bankruptcies, now that rates for conventional energy have dropped, and the government stimulus money that helped jump-start solar has dried up.
As for all the companies that are avoiding bankruptcy right now with cheap loans, they shouldn’t be gloating, says Stephen Lubben, a professor of bankruptcy law at Seton Hall Law School. “If they’re able to refinance and put off addressing real problems with the business, they may just be putting off their pain to a later date,” Lubben says. By 2017, a lot of companies will be facing maturities on their debt, and by then the interest rates may be a lot higher than they are now, Lubben warns.
So although we have low bankruptcy rate right now, Lubben says “We may have to face the music on this.”
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