US Bankruptcies Jumped in April, as Banks Tightened Lending Rules

Sydney, May 7, 2008 (ABN Newswire) - US business conditions are getting tougher.

US homewares retailer, Linens 'n Things went into bankruptcy protection in the US late last week and yesterday regional gambling operator, Tropicana went into Chapter 11 protection, becoming two of the higher profile American failures of 2008 so far.

Tropicana went bust because of a takeover at the start of 2007 left it exposed to a slowing economy, rising interest rates and customers unwilling to gamble as much, while a decision to strip it of a casino licence in Atlantic City late last year added to the pressures which saw it fold this week.

And rather than borrow money to pay for a share buyback scheme and other expenditures, the giant Target discount retail chain has sold 47% of its credit card receivables to investment bank JP Morgan to raise $US3.6 billion.

It said it did this rather than borrow more money in a tough climate and pay more interest to banks and other financiers.

Linens fell over because of the slowdown and the fact that the 2006 buyout for $1.3 billion was too much.

It now has a $US700 million loan to continue operating in bankruptcy: Tropicana's immediate fate will be known in a day or so, once the details of its petition become known. But early reports say it defaulted on more than $US1.2 billion in debt.

They are two high profile non- financial businesses to have collapsed: over 100 subprime mortgage lenders, brokers and markers have either gone broke, closed or being merged out of existence in the past year. The biggest was American Home Mortgage, which didn't operate in the subprime space, but which failed anyway.

The FBI is probing its collapse in a special investigation.

A number of small and medium budget airlines have failed in the US in the past couple of months, the latest being the premium budget carrier, Eos, which went into Chapter 11.

The failure of these companies come as the latest figures on US business bankruptcies show another big rise in April, and as figures from the US Federal reserve show a tightening in lending and credit standards.

That raises the questions of whether the rise in bankruptcies in April was linked to these tougher lending rules, as outlined in a Fed survey.

The figures, from a report from a company called Jupiter sSources, which monitors court records, show business bankruptcy filings rose 49% in April, the biggest gain so far this year, as the US economy continues to slow.

The report shows filings rose to 5,173 during the month. Total bankruptcy filings, including those by individuals, were up 31% from April, 2007, to 93,096.

The US economy lost an estimated 20,000 jobs in April, for the fourth loss in a row and a total of 260,000 jobs have been lost so far in 2008.

The impact of the housing crunch on both business and individual failures is apparent.

Almost 650,000 properties were in some stage of foreclosure during the final quarter of 2007, up 112% from a year earlier, RealtyTrac, which monitors foreclosures, said last week, the Standard & Poor's Case/ Schiller home price index showed a 2.7% fall in prices in the 20 largest metro markets in the US in February: the fall over the year to February in those same markets was 12.7%.

Tougher lending standards are also making it harder for small businesses and homeowners to survive.

The Fed's latest credit survey highlighted the problem of the worsening outlook for cash short or strained borrowers.

The survey covered 56 domestic banks and 21 foreign institutions. The American banks together have $US6.1 trillion in assets, representing about 64% of the country's $US9.5 trillion of assets held by all domestically chartered, federally insured commercial banks.

The Fed said more banks were tightening lending standards on home mortgages, other types of consumer loans and business loans in response to a spreading credit crisis.

The percentage of banks reporting tighter lending standards was near historic highs for nearly all loan categories, with nearly two-thirds of banks surveyed had tightened lending standards on traditional home mortgages with 15% saying those standards had been tightened considerably. The survey was conducted last month and was available for the Fed meeting on April 29-30.

A net 70% of banks increased loan rates over their cost of funds for commercial and industrial borrowing, compared to just 45% in the January survey.

Fed chairman Ben Bernanke said on Monday night that mortgage delinquencies and foreclosures were hurting the economy.

He said in a speech in New York that mortgage delinquencies will weigh on economic growth, pushing home prices down further, hurting the broader economy and threatening the financial system.
He said "it is important to recognize that the costs of foreclosure may extend well beyond those borne directly by the borrower and the lender.

"Clusters of foreclosures can destabilize communities; reduce the property values of nearby homes, and lower municipal tax revenues.

"At both the local and national levels, foreclosures add to the stock of homes for sale, increasing downward pressure on home prices in general. In the current environment, more-rapid declines in house prices may have an adverse impact on the broader economy and, through their effects on the valuation of mortgage-related assets, on the stability of the financial system."

And these foreclosures and delinquencies feed through into bankruptcies.

Jupiter told Bloomberg that it anticipates 2008 bankruptcy filings will total about 1.1 million compared with 827,000 in 2007 and 590,000 in 2006, after a new law took effect in October 2005 that made it harder for people to erase debt.

Jupiter said there were more than 90,000 total bankruptcy filings in March: Given the number of days and adjusting for Easter, in March, there was a 2% drop in total bankruptcy filings in April, according to Jupiter.

More than 18,000 businesses filed for bankruptcy protection in the first four months of this year to either liquidate or reorganize. Around 2700 went into Chapter 11, like Tropicana and Linens


 

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