July 29, 2008

Forecasting a Perfect Storm: Historical Perspective From BankruptcyData.Com

With more than $6 billion in total pre-petition assets, the crack-of-dawn Chapter 11 bankruptcy filing of SemGroup, L.P. on July 22nd ranks as the second largest of 2008. This energy industry heavy-hitter and its subsidiaries provide end user and consumer services worldwide. While the Company's common stock is not publicly-traded, it does hold $600 million outstanding in 8 3/4% Senior Notes due 2015 (CUSIP: 81662TAA3). SemGroup told the U.S. Bankruptcy Court that it is experiencing a "severe liquidity crisis attributable to a host of factors, including, among others, recent margin calls of massive proportions...and overall exposure to the recent extreme credit and volatility in commodity prices."

While SemGroup's Chapter 11 filing is noteworthy, financial services goliath Fremont General Corporation (FMNTQ) currently holds the 2008 gold medal with its $13 billion bankruptcy. As of July 28, 2008, this year has already seen a total of eight separate public bankruptcies listing total pre-petition assets of $1 billion or more. This number shows a dramatic increase from mega-filings since 2003.

Last year, there was one lonely billion-dollar bankruptcy (New Century Financial Corporation (NEWCQ)) through July 28th; and the same holds true for 2006: Dana Corporation's (DAN) $9 billion filing. Looking back to the data for both 2005 and 2004, we see four such filings each year.

Although the eight billion-dollar bankruptcies thus far this year mark a pronounced escalation from previous years' data, this figure still falls far short of any historic high. Collective memory can be short-term; and before a sky is falling forecast is sounded, we should look at the impressive figures from just a few years back. In fact, if we re-visit our 2003 data, we find a figure that doubles the 2008 stats. In 2003, 15 debtors made billion-dollar+ filings with the U.S. Bankruptcy Court by the July 28th cut-off.

2002 had an even more sizable figure of 22 bankruptcies listing $1 billion or more in total assets by this date. That number further swells--and crests--in 2001 with 25 such bankruptcies. Although less than the 2001 through 2003 figures, the millennium opened with an impressive total of 13 billion-dollar+ bankruptcies filed pre-July 28th.

2008 is still young, and what filings may break in the duration of the year remains to be seen. Many industry pundits predict a continuing rise in these mega-filings. George Putnam, III of New Generation Research explains, "There has been a tremendous amount of debt raised during the 2003-2007 period--in the form of both high yield bonds and leveraged bank loans--and a certain percentage of that debt is bound to default. Moreover, we seem to be in the midst of a 'perfect storm' leading to more bankruptcies: high levels of debt, high energy and raw materials costs and weakness in the U.S. economy."

Putnam even envisions a possible return to the historic levels of 2001--"if the elements of this perfect storm continue." While it is impossible to accurately forecast future filing trends, these high debt levels, coupled with economic factors, lead Putnam to believe that this increase in billion-dollar bankruptcies will likely continue for a minimum of 12 months. Data indicates that this upsurge in mega-filings has not yet crested. According to Putnam, a specific time-frame for that zenith remains elusive: "It could peak as early as the middle of 2009, or the wave could continue rising well into 2010."

The chart below represents the total number of public Chapter 11 bankruptcies listing total pre-petition assets of $1 billion or more for each year through the date July 28th.

 Year              Billion-$ (only through 7/28)     Bankruptcies ------------------- -------------------- 2008                  7 2007                  1 2006                  1 2005                  4 2004                  4 2003                  15 2002                  22 2001                  25 2000                  13 

BankruptcyData.com--published by New Generation Research, Inc.--provides news, financial history, creditor information, reorganization details and more for over 2500 publicly-traded companies that have filed for bankruptcy protection since 1980. We are available to consult on the bankruptcy process and any of the billion-dollar Chapter 11 filings referenced in this release.