A view from the turnaround trench: don't let this day of reckoning completely dull our appetite for risk.

• Author: Brandt, William A., Jr.
• Position: Endnote - Column

I WORK IN THE corporate restructuring and insolvency industry, and have for almost the past 30 years. I am probably one of the few who can truthfully say that it's not been a bad business environment for my company lately, although for a variety of reasons it is not as good as some may expect. (In fact, what I do can perhaps best be described as creating flexibility for troubled companies, and this environment is a bit inflexible.) But this perspective and proximity gives me a somewhat unique window as to what is happening in Corporate America.

The headline-grabbing series of high-profile defaults and corporate scandals of the last nine months promise to change the face of corporate governance for many years to come. I want to outline what I believe are several critical issues facing directors and officers in the near future. And I want to raise several issues our policy makers must take into consideration as they confront the daunting task of proscribing remedies to our current circumstance. The consequences will be nothing less severe than a dramatic realignment of our attitudes toward risk and the potential for failure, and the fate of American entrepreneurialism.

Today, we are in the midst of an impressive wave of corporate defaults. I expect in the next six to nine months things will get worse before they get better. We are at a moment in time when interest rates, at a 40-year low, are effectively providing an artificial cushion to companies that might otherwise be teetering on the brink of insolvency. When interest rates rise, these companies will be hard pressed to survive.

In addition, we are about to confront many of the issues relating to the staggering amount of high-yield debt that has been issued throughout the 1990s. In 1991, at the peak of the last big bankruptcy market, the high-yield bond market was about $150 billion. Despite the perception that so-called "junk bonds" are a thing of the past, there is now a market of about $700 billion of such bonds, many of which will either default or mature in the next 18 months. With respect to maturity, I expect there to be few takers in the current environment for such bonds when they come up for refinancing, and feel secure in predicting that this will further the wave of balance sheet restructurings.

Finally, when the recovery truly kicks in, many companies that are currently teetering on the edge because of their association with the already filed massive bankruptcy cases (such as Enron, Kmart, Global Crossing, Adelphia Communications) will go over the precipice, unable to respond to the financing demands for new inventories. This is a classic scenario; in fact, often the strongest sign that a recovery is about to be under way...