Sharper Image, Lillian Vernon seek bankruptcy protection

Ionic Breeze air purifiers and jelly bean jars Wednesday became the latest victims in what's looking like a coming avalanche of corporate bankruptcies.

Sharper Image shrp, source of gizmos such as air purifiers, and Lillian Vernon, a mail-order retailer specializing in holiday decor, filed for bankruptcy protection as the pressures of a slowing economy and credit crunch proved too much to bear.

With lenders increasingly reluctant to bankroll less-than-stable companies, financial experts are braced for more companies to teeter toward bankruptcy.

"What you've seen so far is nothing in terms of what is coming," says Martin Zohn, bankruptcy expert at law firm Proskauer Rose.

Already this year, 13 publicly traded companies with assets of $7.7 billion have filed for bankruptcy protection, says Kerry Mastroianni of BankruptcyData.com. That's the largest dollar value of bankruptcies since the record $64.9 billion at this point in 2002, Mastroianni says.

Bankruptcies are on the rise, and are expected to pick up pace this year because shakier companies face:

•Disruption in the bond market. Companies that need cash are having a tough time borrowing, says Stephen Carter, a credit analyst at Thomson Financial.

Speculative companies that tap the so-called junk-bond market have raised just $1.6 billion in six offerings in the first quarter, Thomson says. At this time last year, riskier companies had easily raised $38.5 billion from 84 offerings.

•Rising cost for borrowed money. Concern riskier companies will struggle to pay debts has driven the average interest rate paid by speculative companies to 11%, says Diane Vazza, bond analyst at Standard & Poor's. That's up from 7.8% a year ago and about 7 percentage points higher than the rate on 10-year Treasury notes. That can be a big problem when companies must refinance cheaper debt that has come due.

Investors have good reason to be nervous. S&P is now expecting 4.6% of speculative companies to default on their debts, Vazza says, vs. a 1.1% default rate last year and a long-term average of 4.4%.

That's why a bond investor such as Robert Gahagan of American Century says he's not interested in buying bonds issued by speculative companies until the interest rates they offer go even higher, perhaps 10 percentage points above Treasuries.

•A weakening economy as consumers cut back. Many companies that have entered bankruptcy protection rely on selling discretionary items to consumers, says Richard Levin, bankruptcy attorney at Cravath Swaine & Moore. Sharper Image and Lillian Vernon are examples, as is Fortunoff, a high-end jeweler that filed for bankruptcy protection on Feb. 4.

Real estate developers and suppliers in the automobile industry are also suffering from the economy's weakness, Levin says. "It's amazing how fast it turned" and bankruptcies have risen, he says.

Bankruptcy experts are mixed on how bad things will get this time. Mastroianni expects more than 100 public companies to file for bankruptcy protection, but nowhere near the 263 in 2001.

But Lewis B. Freeman, a corporate bankruptcy consultant, says record bankruptcies are coming. "It's going to be major major league," Freeman says.

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