The 24/7 Wall St. Bankruptcy Odds Watch (AMR)(UAUA)(NWA)(GHS)(DAL)(LHS)(LEH)(CAL)(WB)(F)(MNI)(AIG)

June 9, 2008 by Douglas A. McIntyre

There are the 24/7 Wall St. odds that several companies will have to file for Chapter 11 between now and the end of the year. These will become a permanent part of the website and the list will be updated once a week.

AMR  (AMR)             1 in 2          Lee Enterprises  (LEE)     1 in 15      Ford (F)              1 in 35
UAL  (UAUA)            1 in 4          Lehman  (LEH)                 1 in 25      McClatchy (MNI) 1 in 35
Northwest (NWA)      1 in 5          Continental  (CAL)            1 in 25      AIG (AIG)            1 in 35
Gatehouse  (GHS)     1 in 5          Wachovia  (WB)               1 in 25
Delta  (DAL)              1 in 10        General Motors  (GM)       1 in 30

These are possibilities rather than predictions. 24/7 Wall St. has reviewed a number of large public companies in order to evaluate the possibility of bankruptcies by the end of 2008, based on the current economy.  We have run cash flow analysis and looked at balance sheets in the most obvious sectors including financials, airlines, old media, and autos. These numbers are based on the chance of a "Chapter 11" filing or a sudden "implied Chapter 11" event happening in the next six months.

The airline sector is perhaps the most at risk. Many carriers can’t operate profitably with $100 oil.  With predictions for $150 crude and the price well above $130 per barrel today, Wall Street has already done the math.  Add to that the latest round of financial results and all the failed mergers attempts.  Cutting capacity and delaying new plane orders can only help in the short term. Chapter 11 is a real risk as it was several years ago without government bail-out funds.

The old media sector, particularly newspapers and print media, has been a bad investment for over two years.  These companies should have seen the transfer from papers to the internet as the major source of news  If they did not diversify into into successful digital media properties, they have only themselves to blame.

The US auto sector may not recover for two years.  The good news is that their employee and retirement costs are under better control than earlier this decade.  The bad news is that the SUV and pick-up truck profit centers have disappeared as fewer consumers want tobuy $4.00+ gas to get 12 miles-per-gallon.  In addition, rising prices of raw materials for auto components are accelerating. While international units make money, they cannot offset ongoing US loses 

Financial companies including money center banks, brokerages, and insurance companies carry significant risks. Bear Stearns demonstrated that. The list for this sector could go on and on.

Some highlights:

AMR shares have fallen from over $29 to just above $6 during the last year. In the most recent quarter, the company had an operating loss of $187 million and interest expense of $194 million. Long-term debt was over $8.7 billion. Company forecasts fuel expense could rise $790 million over the next year.

UAUA was recently described as an operational mess, and the "worst of the worst" by Portfolio. Shares are off from a 52-week high of $51.60 to $8.25. Like all airlines UAL faces the potential of a sharp drop in traffic if the economy worsens. In its latest quarterly filing, the airline shows fuel costs up 50%. UAL’s loss from operations was $441 million. Debt service payments hit $135 million.

NWA has watched its stock fall from $24.25 to $6.94. The company is hoping Delta’s purchase of it will help it save costs. But, it is not clear that its unions will go along with personnel cuts or that the merged company can cut a great deal more capacity. Long-term debt of $6.5 billion and running an operating loss.

GHS is one of the more troubled newspaper companies. Across the industry, ad revenue is falling nearly 10% compared to last year. The company has $1.2 billion in debt. Gatehouse did little better than breakeven on an operating basis last quarter and its huge dividend it pulling down cash. Shares are at $3.46 compared to a 52-week high of $19.60.

DAL shares are down 60% this year. A purchase of Northwest will not help combat the rising price of oil. Long-term debt and capital leases stand at almost $8.4 billion. Company says fuel prices were up almost $1 a gallon last quarter to $2.85. That number could go much higher.

LEE shares have dropped from a 52-week high of $24.97 to $5.57. The company wrote off $841 million in assets last quarter. Advertising revenue dropped almost 6% year-over-year, and that is almost certainly accelerating. Lee is sitting on almost $1.3 billion in debt and, before the end of the year, it probably will not have the operating income to cover debt service.

LEH has been in the headlines for weeks. Most recently its said it would loss $2.8 billion for the last quarter and have to raise $6 billion. The company’s shares are down to $27.50 from a 52-week high of $82.05. As one Wachovia analyst said "the larger capital raise at meaningfully lower prices indicates that the company did not have, and potentially still does not have, a complete grasp of its exposures."

CAL share are down less than most airlines, from a 52-week high of $38.79 to $13.60. For the last quarter, the carrier had an operating loss of $66 million and interest expense of $90 million. Long-term debt at $4.7 billion. Recent 10-Q said that a recession could materially harm results.

WB trades near a 52-week low at $19.76 down from its period high of $54.54. Huge mortgage exposure after buying Golden West Financial Deal may have lost Wachovia CEO his job. As one analyst said "We view Wachovia’s announcement this morning to remove CEO Ken Thompson as a sign that more bad news will be forthcoming." WB can’t take mortgage write-offs forever.

GM trades below where it did in late 2005 when analysts were concerned about a bankruptcy. The car company indicated it may have to raise money. Lehman recently said GM "needs to raise about $9 billion over the next two years to refinance debt, and may seek more for operational cash burn as it faces production headwinds and commodity price increases." And, all off those factors are getting worse. GM may not be able to change its model line away from SUVs and pick-ups fast enough, and domestic vehicles sales have fallen off a cliff.

Ford (F) may be only slightly better off than GM because it seems to be willing to cut costs beyond the bone. It recently took another 15% out of salaried costs. Kirk Kerkorian may like Ford, but the car-maker’s most important line is its pick-ups. Last month, sales of is flagship F-series truck fell 31%. How long can the company survive that?

MNI said its ad revenue dropped 15% in April. In the first quarter, operating income fell to $57 million from $87 million the year before. Revenue went from $567 million down to $488 million. If that topline moves down sharply with the fall-off in advertising, where does the money come from to cover the firm’s $2.4 billion in debt.

AIG has dropped from a 52-week high of $72.91 to $34.28. Large investors are trying to push the CEO out and regulators are looking over how the company valued its mortgage contracts. That is not the worst of it. Citigroup recently wrote that "the insurer’s recent offerings that raised $20 billion in capital are insufficient and that its financial position may worsen." The shoes aren’t done dropping. 

Douglas A. McIntyre & Jon C. Ogg