Many say Boscov's filing just the start

The whispers had been growing for weeks, if not months, and only intensified after the Boscov's Department Store L.L.C. filed for bankruptcy protection last week.

This is just the beginning, the lawyers, investors and turnaround specialists in the region had been thinking to themselves and saying to each other. Just wait and see; more bankruptcies are on the way.

The plunge into Chapter 11 bankruptcy protection by Boscov's, just three years shy of its 100th anniversary and two years after it launched an ambitious expansion to fill the shoes of long-gone Strawbridge & Clothier, evoked shock and sympathy among customers and movers-and-shakers in the local business world.

The Reading family still in charge of the nation's largest family-owned department store chain had valiantly tried to rescue their company from a severe spiral of debt payments coupled with lagging store sales.

But to those watching the economy twitch and sputter, it illustrated the perils that may spell doom for other businesses, too - particularly those that borrowed heavily during boom times, only to find themselves squeezed toward insolvency in this consumer downturn.

U.S. Bankruptcy Court data in recent months show that a wave of business bankruptcies may, indeed, be upon us.

Twice as many businesses filed for bankruptcy the first three months of this year than during the same quarter just two years ago. And business filings overall have steadily climbed since a brief dip that followed restrictive changes to the nation's bankruptcy laws in 2005, according to the American Bankruptcy Institute.

While conventional wisdom suggests the numbers will toll even higher in the months to come, just how many businesses are on the precipice remains a big unknown.

"That is the 64,000-dollar question," said J. Scott Victor, senior managing director and co-head of the Special Situations Group at National City Investment Banking in West Conshohocken.

Victor has a bird's-eye view. The former bankruptcy lawyer has specialized for years in helping distressed companies either avoid bankruptcy or negotiate through it by finding buyers for the ailing enterprises.

Victor has weathered several recessions. He and others predict there will be fewer filings than during past recessions because changes to the law in 2005 made bankruptcies less appealing to debt-soaked businesses.

Another reason, though, is that firms like his - along with hedge funds and private-equity players, whose cash can sometimes help bail out or buy ailing companies - have cropped up over the last decade.

Such firms give creditors like banks an incentive to keep working through near-defaults with businesses long enough to sell parts or all of them rather than resorting to the costly tangle of court-supervised restructuring or liquidation.

The emergence of hedge funds and turnaround firms means "lenders are not as patient as they once were to do a restructuring," he said. Now they "want to be paid out. And the fastest way to pay them out is to find a buyer."

Longtime Cozen O'Connor bankruptcy lawyer Arthur J. Abramowitz, who is cochairman of the firm's bankruptcy practice, said pre-bankruptcy hash-outs are under way with some of his clients in the distressed residential real estate sector - the hardest hit, in his view.

"They're sitting down with the bank and trying to come up with the best deal that they can and give their properties back to the bank and walk away with the best deal possible," Abramowitz said.

But the shaky lending environment - combined with the investment losses that some hedge funds have experienced - means there is less cash floating around. Buyers are scarce.

"Used to be you could always find bottom feeders who would pick this up," Abramowitz said.

So far, loan-default rates are not as high as economists had projected. But that does not mean a lot of businesses are not hurting, Victor said.

"Many of the deals I'm seeing now? When the company's in trouble," Victor said, "it's really in trouble."

The businesses tell him: "We can't make payroll next week, come help us," Victor said.

It used to be that big banks almost always attached red flags, called covenants, to loans so that if a business started doing poorly, the banks would know in advance. How? If the ratio of sales to debt got out of whack, for example, when sales fell steeply.

But during the boom years between 2005 and the middle of last year, Victor said, many big loans were issued without covenant restrictions. If borrowers suddenly experienced a big drop in, say, revenue, banks would be in the dark.

As a result, he said, it is even harder to know when a debt-heavy company may be on the brink, Victor said.