How many other companies are staring disaster in the face? DAVID PARKINSON Globe and Mail Update January 15, 2009 at 6:00 AM EST

For Nortel Networks Corp. stakeholders, yesterday’s bankruptcy protection filing must have come as almost a relief. For the rest of the equity market, though, it might mark the beginning of a whole new phase in risk-juggling.

While the filing finally puts the months of will-they-or-won’t-they speculation to rest, investors had pretty much priced a likely bankruptcy into the stock anyway: Nortel was trading at a minuscule 38.5 cents on the Toronto Stock Exchange before the news broke overnight, roughly 1/100th of what it was less than two years ago. At least it’s out on the table, and what’s left of the stock can now be humanely put out of its misery.

But Nortel’s apparent demise is a reminder that there are still a lot of things that can get worse for stocks before they get better. After working its way through the risk of financial-sector collapse, credit-market collapse, economic collapse and auto-sector collapse, the market’s next challenge is dealing with the aftershocks in other sectors of the market. The companies brought down by the financial and economic woes won’t be limited to financials and a few other select pockets of the market - there are going to be other failures, debt restructurings and asset fire sales in a broadening range of sectors before all is said and done.

And despite the deep selloff the markets have suffered already, market watchers aren’t convinced that this is one of the risks with which investors have fully come to grips.

"Investors do not seem to realize that credit problems so far have largely manifested themselves in traditional ’early cycle’ sectors (such as financials, autos, housing and retailing), and seem unaware of the risks to mid- and late-cycle sectors (such as energy, industrials, materials, and technology)," said Richard Bernstein, chief investment strategist at Merrill Lynch in New York. "We contend that one of the big surprises for 2009 might be that the full brunt of the credit bubble’s deflation will spread from early-cycle sectors to other sectors of the global economy."

As Nortel illustrates, the cracks are beginning to show in the tech sector. In Canada, mining company Teck Cominco Ltd. is teetering on the debt brink. So is media company CanWest Global Communications Corp. Increasingly, analysts see retailers coming under threat. Telecom utilities - traditional dividend-paying staples of many conservative stock portfolios - are starting to feel the debt pinch, one analyst confided yesterday. (As outrageous Hustler publisher Larry Flynt told Washington lawmakers, even the porn industry needs a bailout.)

Indeed, corporate bond defaults have been rising sharply, and are expected to reach unprecedented peaks in the current crisis. Debt-rating agency Moody’s yesterday predicted that speculative-grade default rates will spike above 12 per cent in 2009 - triple last year’s default rate and topping the record levels of 1991.

"I think there’s a great likelihood that we’ll continue to see reverberations outside of the financial sector," said Sam Stovall, chief equity strategist at Standard & Poor’s, another leading debt rater. "I think it would be foolish for people to say it’s going to be contained."

Mr. Stovall said it’s difficult to see whether the threat of bankruptcies has been adequately priced into the various sectors of the market; like many risks in this extraordinary downturn, the depth of its potential impact is impossible to quantify. However, he did suggest that until investors have greater confidence in the risk facing the companies in which they might invest, the bankruptcy issue could overhang the market.

However, in that point lies a glimmer of hope. In past recessions, investors have regained their confidence long before the corporate-bankruptcy fallout is done.

An associate of Mr. Stovall’s at S&P, chief economist David Wyss, points out that the pace of corporate bankruptcy protection filings typically peaks about a year after the economy bottoms, while the stock market typically bottoms three to six months before the economy. While the threat of insolvency might hang over specific stocks with troubled balance sheets, investors are able to look through that and return to the market in general long before those troubles ultimately hit the fan for the bulk of high-risk companies.

That’s all fine and good, as long as investors are adept at identifying the companies that are at risk and steering clear of those stocks. But in the current market environment, where the credit waters are murky and the sharks are circling beneath the surface of untold balance sheets, that will most definitely be the tricky part.