U.S. corporate bankruptcies on the rise

U.S. corporate bankruptcies are increasing. This year, 12 companies with at least $1 billion in assets have filed for bankruptcy protection, surpassing the total of the previous four years combined.

Nearly a half were in the finance or construction industries. The latest, and biggest by far, was regional bank IndyMac Bancorp. High levels of debt, rising raw-material costs and a weak economy are contributing to the rise, which should continue for at least a year, according to George Putnam of New Generation Research.

One sign of worsening financial health, but by no means imminent bankruptcy, is a credit downgrade by a major rating agency. New Generation's Distressed Company Alert newsletter highlights several companies in its Aug. 8 edition that have recently seen their debt downgraded to a level below investment grade by Moody's Investors Service, including American Airlines parent AMR Corp. (AMR), packaging-supply firm Chesapeake Corp. (CSK), auto-parts maker Accuride Corp. (ACW) and privately held real-estate company Realogy Corp. Last month, the chief executive of General Motors Corp. (GM) dismissed speculation that it might soon seek bankruptcy protection.

Shareholders in a company that makes a bankruptcy filing have little chance of recovering their investment. When a company files for Chapter 11 protection, its shares are delisted from an exchange but may continue to trade over the counter while the company reorganizes.

The Securities and Exchange Commission warns that buying stock of companies operating under bankruptcy-court protection is extremely risky and likely to lead to losses. In a Chapter 7 filing, a company is liquidated. When its assets are divided and sold, secured creditors such as banks are paid first, then unsecured creditors such as suppliers and bondholders. Stockholders have the final claim.