Monday, October 1, 2007

Bankruptcy bonanza: defaults to soar 10 times.

This was scary

...Bankruptcy experts believe that what lies ahead for their industry is the greatest market since the epic failures of Enron and WorldCom led a parade of corporate defaults that ultimately totaled $290 billion. With the credit markets in turmoil and the financial wreckage from the subprime mortgage meltdown spreading, the number of companies in financial distress rose the fastest in four years last month. Standard & Poor’s says defaults could soar nearly tenfold next year.

Over the next three years, $470 billion in loans to financially shaky companies will mature, according to Jefferies, as will an additional $120 billion in junk bonds. Many of those companies will find new loans hard to get, or at the very least far more expensive in a market now wary of risk.

“The opportunity [for firms like ours] has the potential to be larger than the last [down leg of the] cycle,” said Thane Carlston, co-head of Jefferies’ financial services advisory group.

Restructuring experts believe that the bumper crop of bankruptcies will include some of the richest pickings ever. They note that bankruptcy work in recent years has become more complex—and lucrative—because of a host of financial innovations. High up on that list is the explosion of derivatives that enable investors to bet on defaults.

These instruments, in their infancy when Enron and WorldCom collapsed, represent a $35 trillion market today. With investor exposure to default so vast and diffuse, it would take time to figure out who exactly is on the hook for precisely what in a big bankruptcy case.

“These are uncharted waters for everybody,” said Mr. Carlston.