The LME factory

2023 was likely the most active year ever for large-scale liability management exercises, with the expanding set of tools for restructuring professionals — distressed exchanges, dropdowns, uptiers and double-dips — on full display (here’s our 9fin primer on priming).

The tone advisors took last year was that by introducing pro rata participation options in double-dip/finco/foreign subsidiary financings, they could reduce so-called lender-on-lender violence.

Notable LME examples in 2023 included Robertshaw, Michaels Stores, At Home, Sabre Corporation, Trinseo, and Wheel Pros. We expect to see further iterations of those structures this year, though 9fin expects elbows to sharpen in 2024 as several of the co-op groups that were formed last year start to get restricted and negotiate in earnest.

The X-factor that could determine how aggressive those negotiations get? The resignation of Judge David R. Jones from the US Bankruptcy Court for the Southern District of Texas (SDTX), and whether the scandal that prompted his exit will have ramifications on decisions he made that crowned victors in bruising battles between lenders.

Even before Jones’s departure, the Fifth Circuit was at the very least expected to remand his important decision on uptiering in the Serta Simmons Chapter 11 case back to New York, amid other litigation related to that transaction.

The fate of mass tort

The forthcoming Supreme Court ruling on the Purdue Pharma case — expected early this year — could dramatically change the power and scope of bankruptcy courts and their ability to free debtors from liability related to mass tort litigation as part of a restructuring.

Further upping the stakes, the decision could even impact whether bankruptcy rulings abroad are recognized by courts in the US.

The fate of the Texas Two-Step (where a company creates a new business, transfers over its legal liabilities, and then puts that entity into bankruptcy) likewise hangs in the balance. The strategy is meant to bring down the costs related to litigation and settlements, but critics say it prevents injured parties from getting their day in court and can limit potential payouts.

Johnson & Johnson is probably the best known company to unsuccessfully attempt the maneuver, though it has signaled it still wants to pursue that approach.

The CRE time-bomb

We’ve covered plenty of the issues facing commercial real estate, for example in this episode of our Cloud 9fin podcast. In a 9Questions interview with us last year, Cynthia Romano, a restructuring and turnaround expert with FTI Consulting, put it this way:

“Thus far, lenders and bondholders have been willing to ‘extend’ (we have long since passed the ‘pretend’ portion of that phrase). But around 25% of US commercial real estate loans will mature over the next two years. Will continuing to extend remain possible?”

That pain — created by higher interest rates and a shift toward remote work brought on by the pandemic — has some opportunistic private credit firms licking their lips. They’re hiring staff and and launching credit funds to capitalize on the situation, which one 9fin source described as a looming “iceberg” of distress.

Healthcare woes

Sponsor-backed healthcare names comprise nearly a third of the active, major ongoing or expected restructurings covered by 9fin — and The No Surprises Act has knocked out a lot of the fees that these companies used to rely on.

The ways in which private equity owners have reshaped the healthcare industry is also under a microscope, with sponsor-backed nursing homes facing scrutiny amid reports of patients being mistreated.

Tech and telecoms struggle

Technology firms that went private through LBOs — many of them during the pre-pandemic boom of deals that were financed at rock-bottom interest rates — are struggling with the cost of their debt.

That challenge was already evident in late 2022, with rising rates pressuring the sector. Now, names including GoTo (formerly known as LogMeIn) are being downgraded further into junk territory as their debt trades at distressed levels.

The telecommunications market is also in a tough spot. High yield bond spreads for the sector widened in 2023 even as every other sector saw spreads tighten, according to research from MUFG.

That is translating into some active distressed situations. Last week, 9fin reported that high-speed internet and TV service provider Radiate Holdco (doing business as Astound Broadband) is fielding liability management proposals from some of its investors.

Is New Jersey the new Texas?

While Texas deals with the fall-out of the Judge Jones scandal, New Jersey — led by Judge Michael Kaplan — is seeing an increase in megafilings, with Bed Bath & Beyond, WeWork and Rite Aid being handled there.

But the SDTX, which includes Judge Jones protégé Judge Christopher Lopez, won’t go quietly. The court is insisting it will keep the two-judge panel that made Houston a destination for sponsor-backed megabankruptcies seeking reliable outcomes.

The court is still the venue of choice for many: for example, Audacy filed its pre-pack in Texas to ring in the new year.

Private credit meets distressed

The private credit space looks pretty clear of distress — at least on paper.

For Q3 23, the overall default rate for senior-secured and unitranche private credit loans clocked in at 1.41%, down for the second consecutive quarter, according to data compiled by law firm Proskauer.

In reality, it’s probably a bit more complicated. Private credit investments aren’t marked to market, and the small lender groups that define the space can generally work together to extend maturities and figure out ways to avoid their investments going sour.

While that sort of flexibility is good for existing portfolio companies that run into trouble, it’s also appealing to some borrowers looking to rework their existing debt structures.

Take Synamedia, for example, which recently closed a refinancing deal with a club of lenders led by Adams Street Private Credit after Moody’s downgraded its debt to Caa1 in October. Other companies in the syndicated loan market have refinanced through private credit as well.

Just because a company has refinanced syndicated debt in the private credit market, doesn’t mean it’s inevitably headed for distress — but it does potentially make it harder to figure out if distress is happening.