The credit crunch in the US triggers an increase in corporate bankruptcies

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Other large US companies are taking refuge in bankruptcy court, a sign of a tightening credit crunch as interest rates rise and financial markets become less hospitable to borrowers.

Eight companies with more than $500 million in liabilities filed for Chapter 11 bankruptcy this month, including five in a single 24-hour period last week. In 2022, the monthly average was just over three deposits.

Twenty-seven large debtors have filed for bankruptcy so far in 2023 compared to 40 in all of 2022, according to data compiled by bankruptcydata.com. Recent companies to succumb to creditors include Envision Healthcare, Vicemedia and Kidde-Fenwal, a manufacturer of fire suppression systems facing thousands of lawsuits over the use of so-called forever chemicals.

THE failures after years of quiescent markets and rising valuations they have allowed even financially stressed companies to raise debt and equity to stay afloat. Debt default rates had fallen to around 1% in 2021 as central banks pumped money into the economy stressed by the coronavirus pandemic.

Now, S&P Global expects the 12-month trailing default rate for speculative securities to drop from the current 2.5% to 4.5% by early 2024.

Junk bond yields have more than doubled from less than 4% in mid-2021, as measured by the BofA US High Yield Index, an indication of how much more expensive capital has become for less creditworthy borrowers. The Federal Reserve has warned that lenders could further tighten the supply of credit to businesses after the recent turmoil in the banking sector.

“Our general view is that we will see an increase in ‘heavy restructuring’, driven by the combination of higher debt levels due to the Covid lending binge and rising interest rates. The triggers will be running out of cash and an inability to refinance maturing debt,” said Bill Derrough, a Moelis investment banker who advises clients in distressed situations.

“Some companies have used every trick in the book and now they’re out of tricks.”

Between 2020 and 2022, several private equity-backed companies pursued “liability management” deals to survive, raising cash through new loans and lengthening maturities.

Such arrangements have been controversial as they reduced the claims of large groups of creditors in bankruptcy. Two companies that have pursued high-profile liability management deals, Envision Healthcare and Serta Simmons beddingthey filed for bankruptcy in 2023.

In the view of some observers, companies could have undergone less complex restructurings and accumulate lower debt burdens if they had avoided such transactions. “Very few of these liability management transactions have been successful,” said Mike Harmon recently, a former investor at Oaktree Capital who now teaches at Stanford University he told the Financial Times.

Troubled companies can save the time and high professional fees associated with bankruptcy by reaching out-of-court settlement settlements, such as debt swaps that reduce principal amounts and stock swaps.

However, the aspects of formal bankruptcy proceedings, including the ability to get rid of unwanted contracts and leases and the ability to force recalcitrant creditors to agree to economic terms, have made them the best option for some companies. For example, Vice Media, whose backers include TPG and Sixth Street Partners, has decided to use Chapter 11 to solicit bids for the company.

“Lenders would much rather restructure their debt in a conference room, than in a courtroom, but sometimes companies have problems that only the Chapter 11 toolbox can solve,” said Vincent Indelicato, legal partner of Proskauer Rose.