US bankruptcy: Houston, we have a solution

US restructuring lawyers have to be tough. The Houston summer humidity is just the beginning of the endurance test for them. The city’s federal court is a magnet for Section 11 bankruptcy law, as filings by Diebold Nixdorf, Incora and GenesisCare attest.

Courts in the Southern District of Texas have sophisticated judges who specialize in mind-bogglingly complex cases.

The bankruptcy business is booming. Last month saw a surge in large-scale cases involving companies with debts exceeding $500 million. On June 1, he had three applications, further expanding the trend.

Base rates are soaring and junk bond yields are normalizing into double digits. Companies like Inora, his supply chain management firm, and Diebold, his POS group, can no longer afford to rush. For stock and junior capital holders, painful calculations will lock in losses.

Earlier this week, Fitch Ratings raised its 2023 default rate forecasts for junk-rated loans and bonds to a maximum of 4.5% and a maximum of 5%, respectively. Bank of America currently classifies $600 billion of assets as “mildly” distressed. Analysts expect most borrowers to recover. But if even some of them defaulted due to bankruptcy or trading below par, the total loss would be significant.

Historically, loan terms have been lax in both loan interest rates and covenant requirements. Wise lawyers and bankers designed increasingly outlandish structures to keep troubled corporations alive. The Orwellian term for such activities is “responsibility management.”

A failed strategy gave birth to new terminology. A common feature of current bankruptcies is pre-filed transactions that set the terms of recovery.

These so-called “restructuring assistance agreements” transfer ownership from existing owners to senior creditors, as evidenced in Diebold, Chapter 11, for example. The previous owner admits that the jig is finally finished. The current wave of infections should be over by the time autumn chill hits Houston’s air.