More U.S. bankruptcy filings are happening with restructuring plans already in place, a trend that’s likely to extend as companies look to save time and money by reorganizing before they get to court.
CiCi’s Holdings Inc., parent of the unlimited pizza buffet chain, entered bankruptcy last month with a plan to hand ownership to lenders. Alpha Media Holdings, which operates more than 200 radio stations across the U.S., filed for Chapter 11 with a similar deal already agreed.
Department store chain Belk Inc. hopes to go one step further this month by filing a pre-packaged bankruptcy, meaning it will complete negotiations with all parties, solicitation and voting in advance. The goal is to complete a restructuring in just 24 hours.
'In and out'
“Businesses are increasingly spending time negotiating and documenting how they plan to exit from Chapter 11 bankruptcy cases before filing for bankruptcy protection,” said Sara Chenetz, partner in the restructuring group at Perkins Coie. This is especially true for companies with complex capital structures, she said.
Pre-packaged filings allow companies to “cut a consensual deal, minimize litigation, and get in and out quickly,” said Jim Van Horn, partner at law firm Barnes & Thornburg. “The gold standard is to do a pre-pack.”
There may be more pre-packaged filings this year than in 2020, when pandemic-driven uncertainty made it difficult to build creditor consensus prior to a filing, said Daniel Shamah, a partner at law firm O’Melveny & Myers. “Having a Chapter 11 that is controlled is always better,” he said.
To be sure, speedy bankruptcy proceedings aren’t universally loved. They risk blocking restructuring proposals that could generate more cash for creditors, especially lower-ranking ones.
Three companies with liabilities of at least $50 million filed for bankruptcy in the week ended Jan. 30, according to data compiled by Bloomberg. This took last month’s total to 12 filings, down from 17 in both December and January 2020.
“You’ll start to see an accelerated pace of filings in the second and third quarter of this year, and perhaps beyond,” said Jerry Switzer, a lawyer at Polsinelli. He expects the retail and hospitality sectors to be particularly busy.
The amount of traded distressed bonds and loans rose to about $131 billion as of Jan. 29, up 2.6% week-on-week, but far below the March peak of $935 billion, according to data compiled by Bloomberg. Troubled bonds increased by 4% while distressed loans fell 2% in the latest week.
By one measure, the amount of outstanding U.S. distressed debt hit a seven-year low in December, according to a new report from S&P Global Ratings. But U.S. corporate defaults still reached their highest level since 2010 in the same month.
Defaults are expected to keep rising amid persistent “revenue generation pressure,” especially in sectors most impacted by Covid, Sudeep Kesh, head of credit markets research at S&P, said in an emailed statement. Distressed exchanges have outpaced bankruptcy filings this year as companies try to delay Chapter 11 or avoid it altogether, he said.
There were 362 distressed bonds from 178 issuers trading as of Monday, according to Trace data. That’s up from 342 and 173 bonds and borrowers, respectively, one week earlier, but significantly less than the 1,896 bonds at the March 23 peak.
Transocean Inc. had the most distressed debt of issuers that hadn’t filed for bankruptcy as of Jan. 29, Bloomberg data show.
