Recent Trends in Corporate Debt and Reorganizations: Laying the Groundwork for Future Big Chapter 11 Cases or Just More Lead? – Insolvency/Bankruptcy/Restructuring


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After Chapter 11 commercial filings reached their highest levels in more than a decade in 2020, the numbers gradually returned to Earth in the latter part of 2020 and in 2021 fell well below annual averages. . The main driver of this reversal was twofold: rapid and robust intervention by central banks around the world and readily available and affordable capital from banks, private equity and hedge funds. Companies were able to amass cash by tapping into existing lines of credit, undertaking significant capital structure reconfigurations and leveraging previously unencumbered assets to fund existing debt and maintain operations during the pandemic. While this temporarily dampened expected increases in restructuring activity, rising interest rates, uncertainty regarding the impact of the pandemic on market demand, inflation and government intervention will all determine whether restructuring trends return to more “normal” historical ranges or continue to be below -average trajectory.

Future restructuring trends will likely depend on, among other things, whether high yield issuance remains stable or continues to slow in the year ahead and liquidity remains readily available and affordable. These macro and micro factors will likely impact the ability of many borrowers to repay existing debt and limit borrower optionality in the future, and could lead to an increase in court-supervised restructurings.

ABSTRACT

After Chapter 11 commercial filings reached their highest levels in more than a decade in 2020, the numbers gradually returned to Earth in the latter part of 2020 and in 2021 fell well below annual averages. . The main driver of this reversal was twofold: rapid and robust intervention by central banks around the world and readily available and affordable capital from banks, private equity and hedge funds. Companies were able to amass cash by tapping into existing lines of credit, undertaking significant capital structure reconfigurations and leveraging previously unencumbered assets to fund existing debt and maintain operations during the pandemic. While this temporarily dampened expected increases in restructuring activity, rising interest rates, uncertainty regarding the impact of the pandemic on market demand, inflation and government intervention will all determine whether restructuring trends return to more “normal” historical ranges or continue to be below -average trajectory.

Future restructuring trends will likely depend on, among other things, whether high yield issuance remains stable or continues to slow in the year ahead and liquidity remains readily available and affordable. These macro and micro factors will likely impact the ability of many borrowers to repay existing debt and limit borrower optionality in the future, and could lead to an increase in court-supervised restructurings.

2020: YEAR OF PEAK RESTRUCTURING

Chapter 11 Deposits Reach All-Time Highs

In 2020, bankruptcy filings reached their highest level since the 2009 financial crisis.1 Ninety-two companies with liabilities exceeding $500 million have filed for bankruptcy.2 That number was an 88% increase from 2019 and a 272% increase from the national annual average since 2005.3 Sixty companies with liabilities exceeding $1 billion have filed Chapter 11, representing a 170% increase from the annual average between 2005 and 2020.4 Chapter 11 filings peaked in July 2020 after three consecutive months of record number of filings.5 Fifty-one companies with liabilities exceeding $1 billion filed from January 1 to June 30, while only nine were restructured in the last six months of 2020.6 For companies with liabilities over $500 million, only 22 filed for Chapter 11 from July 1 to around December 31, a substantial drop from 70 filings in the first half.seven The second half of 2020 therefore saw a faster recovery than that following the filing of a complaint by Lehman Brothers in 2009.8 Indeed, in October 2020, monthly bankruptcy filings returned to historical averages.9

Footnotes

January 2021 Transactions Year in Review, BankruptcyData.com, https: // info.bankruptcydata.com/midyear2021-0?utm_medium=email&_ HSMI = 148251860 = & _hsenc p2ANqtz-9HzGechSmp0rRgoMKwKgTyo-yUou8-7FJcwZH5mQy53o_FeJwWbrNbcxAvLkeuktJYXlozt3u8AKG3_siuvYk1MRvJg & utm_content = 148251860 & source = hs_email utm_.

2 According to BankruptcyData.com.

3 Id.

4 See Trends in Large Corporate Bankruptcy and Financial Distress: Midyear 2021 Update, Cornerstone Research, 1, https://www.cornerstone.com/Publications/Reports/Trends-in-Large-CorporateBankruptcy-and-Financial-Distress-Midyear- 2021-Update.

5 Eight or more companies with assets exceeding $1 billion filed for Chapter 11 in May, June and July 2020. The previous record of eight filings was set in May 2009. Id. at 2 a.m.

6 See BankruptcyData.com, supra note 2.

7 See BankruptcyData.com, supra note 2.

8 See Cornerstone Research, supra note 4, p. 2.

9 Same as 3.

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