Bain Corporate Renewal Group study forecasts recession aftershocks to be felt 'well into 2010'

By Caroline Salls

Pittsburgh, Dec. 1 - A Bain Corporate Renewal Group study found that the aftershocks of the current recession are likely to be felt well into 2010, according to a news release.

According to the release, the Bain CRG fall 2008 default outlook finds that bankruptcies of U.S. companies with $100 million or more in assets will approach 100 in 2010, based on an analysis of macroeconomic trends including a projected default rate of 7% to 9% of corporate issuers of speculative debt and a $500 billion shift away from consumer spending to consumer savings.

Bain said large company bankruptcies currently are tracking to be in the 50 to 75 range in 2008, which is in line with the Bain CRG spring 2008 outlook.

The group said the study estimates bankruptcies next year to surge into the 95 to 120 range, an upward forecast from the spring based on the recent economic downward forecasts for the economy.

"The body blows to industry supply chains will keep on coming into 2010," Bain managing partner Sam Rovit said in the release.

"Because of the lag time between macroeconomic factors and defaults, our study finds that a painful business shockwave will extend further into the future than originally thought."

Bain said two underlying factors that are expected to contribute to an extension of corporate defaults and bankruptcies through 2010 are a roughly $500 billion reallocation of consumer expenditures to savings to rebuild lost wealth and a $200 billion decrease in debt servicing.

The study found that the combined effect is peak-to-trough contraction of $300 billion in gross domestic product, representing a 1% to 2% reduction in GDP.

In addition, Bain said the diversion of consumer expenditures and historically high interest rate spreads place retail and other consumer-cyclical sectors highest on the endangered species list, with companies in media and entertainment, retail, restaurants, consumer non-durable goods and chemicals most at risk.

Based on the results of the study, Bain said it is advising companies with strong balance sheets to rein in spending and gradually begin to acquire assets to improve their competitive position, and the risk for these companies will be buying too early.

"Most companies would be advised to sit on the sidelines for the time being because heavy weather is here for a while and asset values will continue to drop," Rovit said in the release.

Bain said companies with weak balance sheets are most at risk, but those with strong competitive positions should be aggressively cutting costs, divesting non-core assets, building cash and protecting liquidity.

The release said the study warns that companies with weak balance sheets and weak competitive positions are not likely to survive the current downturn unless drastic actions are taken to restructure the business.

Bain Corporate Renewal Group, a subsidiary of Bain & Co., provides integrated, rapid turnaround services.

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