August 20, 2008

Investors Hope to Cash in on Bankruptcy Filings

By Matt Krantz

The slowing U.S. economy is forcing more companies into bankruptcy court, prompting some on Wall Street to wonder if rivals of the struggling firms will end up reaping some of the benefits.

"Longer term, a competitor can benefit from an (industry) shakeout," says Diane Vazza, bond analyst at Standard & Poor's.

There's no shortage of shakeouts. This year, 71 public companies with more than $75.8 billion in assets have filed for bankruptcy, says That tops the level of assets in bankruptcy in all of 2007.

Investors are handicapping areas where competitors might, or might not, get a boost, including:

*Linens 'n Things. The home-goods retailer, which filed for Chapter 11 bankruptcy-court protection on May2, may close about 205 stores, if not more, according to Mike Baker, analyst at Deutsche Bank. If so, rival Bed Bath & Beyond would end up with 30% share in those markets, which Baker says would go directly to its bottom line.

Retailers are particularly vulnerable, because their suppliers may become less willing to deliver inventory or may demand strict repayment terms, fearing they might not get paid, Vazza says. Linens 'n Things did not return a call for comment.

*Six Flags. The amusement park operator defaulted on debt on June24, S&P says, just ahead of the critical summer vacation season. Six Flags shares are down 44% this year. Meanwhile, rival Cedar Fair's results have exceeded expectations, and its stock is up 6%.

So far, benefits to Cedar Fair have been indirect, says James Hardiman, analyst at FTN Midwest Securities. In some parts of the country where Six Flags and Cedar Fair compete directly, such as California and the Washington, D.C., area, Cedar Fair may benefit by being better able to afford promotion, he says.

Cedar Fair also benefited indirectly by buying Geauga Lake, a park near its Cedar Point park in Sandusky, Ohio, from Six Flags in 2007 and closing the amusement park portion in time for summer. Plus, it's unlikely Six Flags can afford to lure visitors by building the same jaw-dropping rides Cedar Fair can, he says. "The gap with Six Flags will only widen," Hardiman says.

*IndyMac Bank. The collapse of the mortgage company was the largest bankruptcy filing this year. That's opened up opportunities for banks in the Southern California area. "The stronger banks in general are able to cherry-pick business," says Brent Christ of Fox-Pitt Kelton.

That's not to say rivals of companies that file don't also feel some pain. For instance, casino operator Tropicana filed for bankruptcy protection in May, presenting a positive for MGM Mirage, says Joel Simkins, analyst at Macquarie Research. Still, that doesn't solve the problems of pricey gasoline and airfares that are hurting all casinos. "When the tide is sinking, everyone feels it," he says. (c) Copyright 2008 USA TODAY, a division of Gannett Co. Inc. <>