Recent Trends in Corporate Debt and Reorganizations: Laying the Groundwork for Future Large Chapter 11 Cases or Just More Runway?
After commercial Chapter 11 filings soared to their highest levels in more than a decade in 2020, the numbers gradually came back to Earth in the latter part of 2020 and, in 2021, fell well below annual averages. The primary driver of this reversal was twofold: swift and robust central bank intervention around the world and readily available and affordable capital from banks, private equity, and hedge funds. Companies were able to amass liquidity by tapping into existing lines of credit, undertaking major capital structure reconfigurations, and leveraging previously unencumbered assets in order to finance existing debt obligations and maintain operations during the pandemic. While this has temporarily abated anticipated increases in restructuring activity, increased interest rates, uncertainty regarding the pandemic's impact on market demand, inflation, and government intervention will all factor into whether restructuring trends return to more "normal" historical ranges or continue their current below-average trajectory.
Future restructuring trends will likely turn on, among other things, whether high-yield issuances remain steady or continue to slow in the coming year and whether liquidity remains readily available and affordable. These macro and micro factors will likely impact the ability of many borrowers to afford existing debt and limit borrowers' optionality in the future, and could prompt an increase in court-supervised restructurings.
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