Bankruptcy & Creditors' Rights Co-Chair Randy Klein has provided his insights for "The Year in Review" article published in the December 2023 edition of Turnarounds & Workouts. He is among seven experts that Turnarounds & Workouts asked to look back on how the industry shaped out in the past year and share their views.
The article leads by citing data from Epiq Bankruptcy Analytics. This includes that the total commercial bankruptcy filings for the first nine months of 2023 surpassed by nine percent the total for calendar year 2022. About 23,308 commercial bankruptcy cases, including commercial business Chapter 11, 7, 13 and 15 cases, were filed through November 2023. This compares to 21,396 total commercial bankruptcy cases filed in 2022; 22,561, in 2021. About 32,517 cases were commenced in 2020 and 39,050 cases in 2019.
Data from Epiq also showed that around 6,040 commercial Chapter 11 filings were commenced in the first nine months of 2023. This represents a 58 percent increase from 2022's total and a 62 percent increase from 2021. About 3,816 commercial Chapter 11 cases were initiated in 2022 and 3,726 in 2021.
The latest issue of Turnarounds & Workouts is available HERE. Following are Randy's comments included in the article.
Describe how the restructuring activity looked like this year for you and your firm: Many of the larger corporate reorgs were driven by liability management transactions and forum shopping to resolve related litigation. For the middle market, more of the Chapter 11 cases were a result of an overleveraged balance sheet, shrinking enterprise value and the need to convert debt to equity in an in-court process, or as a part of an attempt to find a going concern purchaser under section 363 of the Bankruptcy Code. Our restructuring activity is up significantly over 2022 levels, in large part due to out-of-court restructuring and deleveraging activities, as refinancing (at higher interest rates) is no longer the solution for middle-market borrowers.
Which sectors saw the most restructuring activity in the past year? Retail and, in particular, consumer discretionary spending businesses that saw an unsustainable bump during COVID. Restaurant restructuring continued post-COVID to provide a significant amount of workflow, as well as leveraged rollups in the healthcare space that created unsustainable capital structures.
What trends emerged in the second half of 2023? Increased floating interest rates put significant strain on overleveraged middle market companies. Real estate continues to be a problem without a solution. It’s not a question of grabbing a falling knife. No one seems to want to pick the knife up off the floor either.
What deals, cases or issues stood out in the second half of 2023? Forum shopping and liability management transactions came together in the Serta case filed in Houston (former Judge Jones). For bankruptcy practitioners not involved in the case itself, it was a stunning display to see a bankruptcy judge take litigation away from a federal district court judge. The other big issue is obviously the much-needed clarity on the power of the bankruptcy court to grant third-party releases under a plan. This is not just the Purdue case, or the equally divisive Boy Scouts case, but is an issue that pervades all of Chapter 11 practice. Many Chapter 11 parties want the releases to bring “closure” and certainty going forward, but many bankruptcy lawyers have quietly (and in some cases not so quietly) questioned the validity of this practice of obtaining plan releases that has developed over the past 20 years.
Are there restructuring-related events or issues in the past year that, in your opinion, should be talked about more? Too few courts have grappled with the doctrine of “good faith” in connection with amendments to loan documents. There is no way to anticipate and draft all potential future constructs into a loan agreement. The suggestion made by many that the majority is unconstrained to amend documents (unless expressly prohibited) will prove in the long run to be bad for lenders generally. There has always been an overriding doctrine of good faith, it is just that the courts have found it easier to put the burden on the lawyers to draft better documents.
What changed in your outlook on the restructuring industry since early January 2023? I did not expect the continuation of the private debt investment dollars to continue pouring into the senior loan asset class, creating the continuation of too much supply. With too many dollars chasing deals, the borrowers and their counsel continue to have the leverage to drive loose and faulty documentation (from the lender perspective).