Debt Monster Devours Companies
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When private equity giant Wasserstein & Co. bought Harry & David in 2004, the future seemed as sweet as one of the Medford company's baskets of juicy Rogue Valley pears.Harry & David's 75-year history of quality and Wasserstein's Wall Street savvy appeared to be a potent blend. Almost immediately, Harry & David took the requisite first steps toward a public stock offering, which held the promise of a hefty payday.
What happened? The economy, of course. There are few more discretionary buys than one of Harry & David's spendy mail-order gifts. For customers nationwide, the company's $29.95 5-pound box of Royal Riviera pears became dispensable after the economy tanked.
But it was more than that. Harry & David also illustrates the downside of big debt.
After Wasserstein took control, Harry & David's long-term debt soared from zero to $245 million.
The debt itself did not drive these companies to the precipice. But it did put additional pressure on their balance sheet and removed much of the cushion they had when the economy soured.
"The thing that has shocked economists and business owners worldwide is how fast and deep consumer demand has declined," said Portland money manager Michael Elfers in a July missive to his investors. "We have reached "peak debt," the point where additional credit is no longer available and interest payments on outstanding debt forces a reduction in spending.
"This is the new normal," Elfers added, "forced frugality."
Adding to many corporations' problems is the sudden difficulty in getting credit. Nearly a year since Congress authorized the controversial multitrillion-dollar bank bailout, required in part to save the industry from its mistakes and malfeasance, the credit crisis remains a reality for many borrowers. Banks, which enabled and profited immensely from the run-up in debt, have retreated from the market as their own loan portfolios have deteriorated in quality.
Some well-known retailers didn't last a year in the new era of austerity. Locally, Portland-based sporting goods retailer Joe's folded last spring after its banks pulled its financing.
