Debt brings down venerable manufacturing firms, right on schedule

Here's the formula. Take one part debt bubble from 1% interest rates and financial engineering, two parts hubris and self-delusion, add a recession and a credit crunch two years later and what do you get? A wave of bankruptcies and unemployment.

Crystal, china maker Waterford Wedgwood collapses
January 5, 2008 (Jane Wardell, AP Business Writer)

Waterford Wedgwood files for bankruptcy protection after failing to find a buyer

Wedgwood has been an iconic name in British pottery for 250 years, after its founder Josiah Wedgwood opened the first factory in Stoke-on-Trent, central England, in 1759. It began making bone china in the 19th century.

Waterford Crystal traces its lineage to a factory opened in Waterford, southeast Ireland in 1783, although that business failed in the 1850s. The brand was revived by Czech immigrant Miroslav Havel in 1947.

Waterford Wedgwood, which employs around 7,700 worldwide, is the latest in a burgeoning list of iconic British companies to succumb to the global economic slowdown and credit squeeze. Department store veteran Woolworths, the queen's tailor Hardy Amies, tea and coffee merchant Whittard of Chelsea and fellow ceramics stalwart Royal Worcester and Spode have all filed for bankruptcy protection in recent months.

AntiSpin: Didn't survive the last real Great Depression (see The Real Great Depression) and hasn't survived this one, either, even in its early stages. Why did Waterford go out of business after surviving every downturn since the end of WWII? In a word: debt.
The company, which has net debts of €449 million, had been unable to raise €150 million of new equity it had sought in August.

Waterford Wedgwood has been forced to appoint a receiver, which it named as David Carson from Deloitte, the accountancy firm, after it missed a January 2 deadline to meet loan repayments. - Waterford Wedgwood collapses over debt pile, Times Online, Jan. 5, 2009
How much debt is that?
The company last month reported pre-tax losses of €63.2m for the six months to October 4, up 13% from the loss of almost €50m a year earlier. Revenue fell by 15% to €207.6m, though the fall was only 6% when currency movements were stripped out. - RTE Business, Waterford Wedgwood runs out of time, Jan. 5 2009
What is a company with €207.6m in annual revenue doing with €449 million in debt?
Waterford Wedgwood also announced it had refinanced its debt through a new arrangement with a subsidiary of Wachovia of New York, but offered no details of the terms. - USA Today, Waterford Wedgwood wants to buy Royal Doulton, Oct. 12, 2004
Without the debt, the company may have survived a 6% drop in revenue. How many more companies levered up during the 2004 to 2006 boom years who without debt might weather the economic storm but instead will go bust in the year ahead as they find themselves unable to make debt payments? Who could have known?
Add to the two generally acknowledged guarantees in life -- death and taxes -- a third: recessions after a massive speculative bubble has collapsed. And if we get a recession next year, as we've pointed out before, a bunch of uneconomical PE buy-outs will become even more uneconomical. It's not unlike the post tech stock bubble, except rather than the venture capital (VC) money drying up that's needed to keep uneconomical businesses running that were started during the boom, companies will be left trying to make huge principle and interest payments on debt. - iTulip, After the buyout boom: The bust?, Dec. 18, 2006
The USA's first and oldest outplacement consulting company is Challenger, Gray & Christmas, providing outplacement programs for executives, and middle managers, and key employees. When we interviewed Challenger CEO John Challenger, June 13, 2007 six months after our forecast he told us:
Janszen: Bond securitization, such as CDOs in the mortgage industry and CLOs in private equity, has for the past few years created new credit to fund commercial real estate growth and private equity deals. Now that the market for these debt products is slowing down, we expect a slow-down in these sectors. For example, the market for mortgage related CDOs declined from $30 billion in April to $2 billion in May. Are you seeing any indication yet of weakness in either commercial real estate market or in industries which have been the target of private equity deals?

Challenger: No indications yet, but a recession caused by an increase in bankruptcies and layoffs due to corporate over-indebtedness is a plausible scenario.

Janszen: Overall, what's your prognosis for the US economy over the next year?

Challenger: We are at the end of this economic cycle.
What impact will this have on unemployment? The AP story goes on:
Much of the business has now shifted offshore, where it employs 5,800 people, including 1,500 people at a plant in Jakarta, Indonesia, which produces most of the company's ceramics. The majority of its crystal production has been handed to Eastern European subcontractors.
They do not mean that the business has shifted offshore but that the jobs shifted offshore. If "globalization" meant post-industrial, FIRE Economy based countries like the US and the UK outsourcing jobs while keeping the sales, marketing, distribution, and revenue collection at home, what are the implications for the countries to which the jobs were outsourced now that the post FIRE Economy debt deflation is putting these companies out of business?
The company employs a work force just a third of that size at 1,900 in Britain, including around 600 in Stoke-on-Trent and 800 in Waterford.

Waterford Mayor Jack Walsh said the closure of the crystal factory would deal a cultural and psychological blow to all of Ireland, noting that the crystal plant was one of the country's top tourist attractions and the product "one of only a handful of iconic Irish brands.'
Unemployment will rise rapidly in the countries, such as China and Indonesia, where the manufacturing jobs were outsourced to and goods manufacturing is a large part of the jobs base. In the US and the UK, where the manufacturing jobs were outsourced from, job losses will be just as high but in the sales, marketing, and distribution sectors of the economy (see Housing Bubble Correction Update: Here comes the jobs crash). We believe that the collapse of FIRE Economies is putting "globalization" into fast reverse in 2009 (see Pop goes the Globaloney Economy).

iTulip Select: The Investment Thesis for the Next Cycle™


To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List

Copyright iTulip, Inc. 1998 - 2007 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer