Here Come the Bankruptcies

Paul Allen, the co-founder of Microsoft, has been one of the worst investors of all time. For well over a decade he has made many poor investments but his biggest albatross has been Charter Communications. This cable company has been in poor financial straights for as long as we can remember. Mr. Allen has financed this company with increasing amounts of debt for years and is finally ready to put the company into bankruptcy. In stronger markets, overleveraged companies like this have been bailed out time and time again through the refinancing of debt. However, happy times are not here anymore and the high yield market is not open to weak companies with too much debt.

Charter may be the biggest name announcing an imminent bankruptcy but the rush to Chapter 11 is accelerating with names such as Muzak, Aleris, and Midway Games. General Growth and Sirius-XM radio are still seeking financing to avoid the same fate. We expect this trend to continue throughout 2009 and 2010. Many of these companies will restructure and become leaner organizations with lower leverage. This process is healthy for the economy long-term but could lead to many more layoffs in the short-term.