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KAI RYSSDAL: As it happens the Fed made one more credit-related move today. It proposed new rules to protect consumers from fraudulent or deceptive credit-card issuers. Credit’s also gotten some companies in trouble. Linens ‘n Things is the most recent example. The company filed for Chapter 11 bankruptcy protection today. That’ll give it some breathing room while it reorganizes and shuts down 120 of its stores. Now that homes aren’t selling like they used to, neither are new bedspreads and vacuum cleaners. But our New York bureau chief Jill Barshay reports many retailers just couldn’t handle their debt.
JILL BARSHAY: Linens ‘n Things was bought out by private equity firm Apollo Management in 2006. Apollo saddled the company with more than $1 billion in debt. Brian Bethune is chief U.S. financial economist for Global Insight.
Brian Bethune: Heavy debt or leverage is a very powerful tool when business is expanding. But it definitely will come back and bite you on the heel when business is very stagnant or even volumes are down.
Most companies that went through a leveraged buyout are keeping their heads above water. In fact, investors have been snapping up this risky debt at bargain-basement prices in recent weeks.
But for the ones in troubled sectors like housing, retail and autos, making debt payments is especially tough.
Diane Vazza heads global fixed income research at Standard & Poor’s. She predicts 75 more companies will default on their debts in the next year. That’s compared with just 16 companies in all of 2007. Half of them will be ones that went private and loaded up with debt.
Diane Vazza: I think where it becomes more tangible is when consumers start to see, they’re driving by on the highway and they see that their retail stores are closing. Now, they might not be shopping there at the moment, but that really brings everything home.
Vazza says the sight of these stores shutting their doors could make consumers pull back more and make the downturn worse.
In New York, I’m Jill Barshay for Marketplace.