In Part 1, we took a look at why the global economy is set to go through a major transformation, while Part 2 featured an analysis of the gathering financial storm clouds on the American economic horizon. Now, given ACM Partners’ focus on distressed management and investing, it makes sense we round out our look ahead at 2012 with an overview of sectors teetering on the brink of severe distress headed into the New Year.
When it comes to the topic of corporate distress, the 4th quarter of 2011 was, for all intents and purposes, the quarter of the massive bankruptcy. A variety of economic pressures, such as decreased demand, the impact of rising commodity prices, and concern over the Euro zone contagion, became too much for even some of the biggest American firms to survive.
Filing for Chapter 11 protection on October 31 at least in part due to bad bets made on European sovereign debt, MF Global led the onslaught of bankruptcies, with the 8th largest chapter 11 filing in American history. American Airlines – the lone legacy airline in the United States that avoided filing in 2002-2003 – soon followed MF Global’s bankruptcy suit, weighed down by increasingly burdensome and untenable union and commodities costs. Eagle Bulk, one of the largest U.S.-based owner of Handymax dry bulk vessels, hinted to the markets that bankruptcy may be on the horizon for 2012. Finally, due to increasing dairy prices, Friendly’s, that all-American purveyor of ice cream treats, found itself in “Chapter 22” (aka, Chapter 11, for the second time in 4 years).
What, then, does this multitude of late-year filings mean for the bankruptcy and distressed markets in 2012?
Per the Friendly’s bankruptcy, ACM Partners sees distress hitting a few key industries/sectors in the American economy in 2012:
- Food/Beverage/Restaurant: As we’ve outlined above, the Friendly’s “Chapter 22” suggests a broader distressed trend in the food and restaurant industry for 2012. In particular, lower-than-predicted holiday spending, rising commodity costs, and the impending “slow dining season” that historically hits the first quarter of the New Year means the food, beverage, and restaurant space could encounter severe stress in 2012.
- Retail (specifically, apparel): Much like the food/beverage/restaurant sector, America’s retail apparel market is set to hit distress in 2012. Over-expansion between 2007-2009, volatile commodity prices (i.e. cotton), increased competition (i.e. Forever 21), and decreased demand mean retailers such as GAP, H&M, and Anthropologie could be shutting doors and decreasing earnings in 2012. On an even more micro level, look for boutique apparel stores scattered across America’s urban landscapes to encounter even deeper distress, as local consumers figuratively tighten their belts and wallets.
- Municipalities: We’ve said/written it before, so we’ll say/write it again: 2012 may be the year we start seeing America’s municipalities and local governments hitting distress, as they find themselves forced to deal with both increasing bond and pension obligations (read ACM Partners’ white paper on the topic here). Meredith Whitney (as well as Nouriel Roubini) may have mistimed the “sky is falling on governments” call, but the dual impending pressures on America’s public markets remain the same: as tax revenues decrease, public spending obligations (i.e. pensions, etc.) increase, and a sharp increase on reliance upon government-sponsored services and offerings (as the private sector lays off more and more people) means the municipal sector is headed for serious distress in 2012.
So there we go. Without sounding like Chicken Little, we here at ACM Partners believe 2012 may go down as the Year of the Catalyst: a spreading crisis in the Euro zone, volatile commodities prices, and crunching credit markets may very well combine to make 2012 an increasingly uncomfortable one for business owners, consumers, and America’s governments. Don’t say we didn’t warn you.
Margaret Bogenrief is a partner with ACM Partners, a boutique crisis management and distressed investing firm serving companies and municipalities in financial distress. She can be reached at [email protected]