Companies are restructuring and doing workouts sooner than they used to, causing bankruptcies to be fewer and smaller, according to panelists discussing the latest workout strategies. Increased liquidity also means that distressed companies can obtain financing more easily to avoid bankruptcy or have the opportunity to restructure before Chapter 11 is necessary.
"We are in a different environment today compared to four years ago," said Andrew Kassner, executive partner at law firm DrinkerBiddle. "In the past, companies defaulted on their debt and then went into bankruptcy to complete a sale of assets. Today, filings are down, but the amount of distressed debt is up. Workouts are starting earlier and there are more restructurings done before bankruptcy filings occur. We will continue to see the business planning of distressed company restructurings done outside the courts."
Companies that do go into bankruptcy also have more cash on their balance sheets. Delta Airlines, Northwest Airlines and Delphi, for example, recently filed for bankruptcy with a large amount of cash on hand. Murry Stegelmann, managing member of Kilimanjaro Advisors, a fund focused on stressed and distressed bank loans and bonds, said that the large amount of cash each these companies had on their balance sheets when they filed showed they tried to get ahead in the restructuring process. "I was gratified to see that in the bankruptcies of Northwest, Delta and Delphi, each one, when it filed, had more than $1 billion of unencumbered cash on its balance sheet. In Delta's DIP loan, it has a covenant that requires it to have at least $750 million in cash. In Northwest's case, it didn't even need to get a DIP. It is unheard of for companies to file with that much cash," said Stegelmann.
The large amount of liquidity is also causing distressed debt to trade higher than it used to. The debt of some bankrupt companies is even trading at a premium to par. "It is more difficult to see if a company is stressed or distressed," said Stegelmann.