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As mentioned in several previous articles, there is growing evidence that corporate bankruptcies and restructurings are on the rise. The principal drivers for this are the huge amount of debt that has been raised over the last decade, and the sharp decline in commodity prices. There are also industry specific issues, such as in retailing, where Internet sales are transforming the sector.
An increase in bankruptcies isn’t necessarily a bad thing. A periodic culling of weaker companies is healthy for the economy. The threat of distress also helps to focus management’s attention. As former Eastern Airlines CEO (and astronaut) Frank Borman once said, “Capitalism without bankruptcy is like Christianity without Hell.”
For a few companies in particular an increase in bankruptcies and restructuring would definitely be a good thing. These are companies that consult or advise on corporate restructurings and those that invest in bankruptcies and other distressed situations. Many of these companies are privately held, but the seven contrarian opportunities detailed in the most recent issue of my distressed investing newsletter have actively-traded public stocks and are poised to profit from the anticipated bankruptcy uptick.