The bankruptcy business is booming

Marketplace Staff Mar 9, 2009

The bankruptcy business is booming

Marketplace Staff Mar 9, 2009


Bill Radke: The signs said it all: All sales are final. Circuit City closed its doors for good yesterday. The company filed for Chapter 11 bankruptcy protection in November. The hope was to emerge as a stronger company, but it couldn’t work out a sale or new financing. Circuit City leaves behind more than 18 million square feet of vacant retail space and more than 34,000 employees.

Fortune magazine editor Allan Sloan. Allan, good to talk to you. Many companies are choosing to go the way
of Circuit City — liquidation instead of reorganizing in bankruptcy. Why is that?

Allan Sloan: Because when a big company goes bankrupt, it needs money. Because it needs money to operate, because usually the reason it’s going bankrupt is it doesn’t have very much money.

Radke: Right.

Sloan: So what happens is the bankrupt, or whatever you want to call them, gets what’s called in the trade “dip financing.” And that doesn’t mean a pickpocket, it means debtor in possession financing so it can run its business while it’s in bankruptcy and try to figure out what to do and how to reorganize.

Radke: And that’s a loan, and those are scarce.

Sloan: Right, especially in the bankruptcy world, because a lot of the institutions that made these loans aren’t making these loans anymore for a variety of reasons. And the rates on the ones that do get made, and there aren’t that many, are something like 17 percent. And I have this image of a company in bankruptcy court whipping out its Mastercard getting a cash advance.

Radke: So Allan, what is a poor, dying company to do?

Sloan: Well, it can liquidate, you know, sell everything, go out of business, which is what some of these retailers have done. And instead of maybe reorganizing, and it being a small company but emerging as a company, the pieces get sold in bits and pieces, or just sort of sit there like a dead mackerel on the beach, and you know that’s it and the company goes away. I don’t know if this is any tragedy, but it sure is for the people who don’t have any jobs.

Radke: So where is this sad situation headed?

Sloan: Well, that depends. The better things are for the bankruptcy professionals, generally speaking, the worse things are for the rest of us. So the one thing we can look forward to, maybe, is the boom in bankruptcy ending. In which case if I hear the bankruptcy professionals complain that it’s getting hard for them to find work, maybe that means there’s hope for the rest of the economy.

Radke: That’s a complaint you want to hear.

Sloan: Indeed.

Radke: Allan Sloan, senior at large at Fortune Magazine. Thanks, Allan.

Sloan: You’re welcome.

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