GeekMBA360

Circuit City declared bankruptcy on November 10, 2008. A couple of months later, on Jan 16, 2009, it announced that  it would shut down its remaining 567 stores and liquidate.

For us consumers, there would be some really good deals due to the liquidation sales. 🙂 However, there is something particularly alarming about this news.

One could argue that a number of reasons contributes to Circuit City’s demise. For example, Best Buy is an aggressive competitors that have opened bigger stores in better locations. A large percentage of Consumer Electronic sales are going online. Circuit City’s management made a number of critical strategic mistakes in the past few years.

But, the most direct cause for Circuit City to liquidate is that it could not meet its debt obligation to its vendors and creditors. When an economy is doing well, a large company like Circuit City could either sell itself to someone, or re-finance its debt. In today’s harsh economic environment, given the credit crunch, it’s virtually impossible for Circuit City to refinance its debt.

The going rate for corporate debt is about 15%, which is very high. the New York Times just borrowed $250 million from the world’s second richest man, Mexican telecommunication billionaire Carlos Slim at a steep interest rate of 14 percent.

If you work for a company that has debt due in the next few months, you should pay attention to your company’s financials and make sure it has the cash to pay back the loan. I know a number of start-ups chose debt financing over equity financing in the past few years because the management want to avoid stock dilution. The intention is good, but these companies need to pay the money back  eventually. If the debt is due in 2009, the borrower better have cash in hand.

If you work for a company that needs to borrow money, good luck. 🙂 Fifteen percent is a very steep rate. And not every corporate borrower can get debt at 15% – only the ones with really good credit ratings.

I think in the next few months, you’ll see an increasing numbers of corporate bankruptcies due to companies’ inabilities to meet their debt obligations.

Please pay attention to your company’s financials, and plan accordingly.