May 21, 2005
U.S. Bankruptcy Roundtable
Featuring Neil B. Glassman
US companies are benefiting from a red-hot liquid lending market. Banks and institutional investors are eager to provide corporate financing and participate in as many deals as possible by issuing various forms of debt. This liquidity has funded restructurings and generally kept bankruptcy filings at relatively low levels. However, economic cycles dictate that a downturn will be inevitable at some point in the future. This roundtable discussion examines current market trends to identify where the seeds of the next bankruptcy wave are being sown.
Sprayregen: What factors do you attribute to the decline in corporate bankruptcy filings? Does the decline reflect overall improvement in corporate performance, the health of the economy, the increased willingness of banks and other secondary lenders to extend credit, or the ability of companies to obtain capital through other means, such as bond or sub-debt issuances, private equity investments, stock offerings, and so on?
Newman: Many factors have led to a reduction in corporate bankruptcies during the last few years. A generally strong economy has led to improved operating performance and cash flow for many companies. Similarly, interest rates at or near all-time lows have reduced the cost of capital for most companies. However, the most significant factor behind the reduction in bankruptcies has been the dramatic increase in availability of capital – particularly debt capital – to companies. In recent years, banks have become more aggressive lending to companies near financial distress in connection with “rescue financing”. Similarly, the explosive growth in hedge funds, especially those dedicated to distressed situations, has made billions of dollars of capital available directly to companies. Absent this capital, many of these companies would need to pursue a restructuring.
Patton: The emergence of new, risk-tolerant lending sources, including hedge funds, and the general availability of cheap capital and cheap debt are the primary sources behind the recent decline in corporate bankruptcy filings. Additionally, an increasing sophistication among lenders and the work-out community has lead to an increase in out-of-court restructurings.
Loughlin: The availability of capital looking for higher returns in a generally flat stock market and low interest rate environment appears to be driving the credit markets appetite for taking increasing levels of risk. The rapidly growing hedge funds are willing to provide capital to companies that would otherwise be forced to restructure today.
Glassman: A far greater percentage of the available capital is now managed by hedge funds, who bring a new dynamic to the market in that they are more nimble and make investment decisions much more quickly than other types of investors. The overall availability of financing has helped many ailing companies to survive, and those companies that operate on a leaner basis have been able to achieve strong investor returns and increase enterprise value in good times.
Pernick: Even banks, which in past years limited themselves to relatively ordinary and traditional loans, now have divisions that get involved in debt and equity transactions that are quite different from the traditional bank loans of the past.
Mayerson: There is no doubt that with so few deals around, competition among lenders is high. Many lenders are certainly willing to make riskier investments, and hedge funds are a strong example of this trend. In a low interest rate environment, with the abundance of
US companies are benefiting from a red-hot liquid lending market. Banks and institutional investors are eager to provide corporate financing and participate in as many deals as possible by issuing various forms of debt. This liquidity has funded restructurings and generally kept bankruptcy filings at relatively low levels. However, economic cycles dictate that a downturn will be inevitable at some point in the future. This roundtable discussion examines current market trends to identify where the seeds of the next bankruptcy wave are being sown.
Sprayregen: What factors do you attribute to the decline in corporate bankruptcy filings? Does the decline reflect overall improvement in corporate performance, the health of the economy, the increased willingness of banks and other secondary lenders to extend credit, or the ability of companies to obtain capital through other means, such as bond or sub-debt issuances, private equity investments, stock offerings, and so on?
Newman: Many factors have led to a reduction in corporate bankruptcies during the last few years. A generally strong economy has led to improved operating performance and cash flow for many companies. Similarly, interest rates at or near all-time lows have reduced the cost of capital for most companies. However, the most significant factor behind the reduction in bankruptcies has been the dramatic increase in availability of capital – particularly debt capital – to companies. In recent years, banks have become more aggressive lending to companies near financial distress in connection with “rescue financing”. Similarly, the explosive growth in hedge funds, especially those dedicated to distressed situations, has made billions of dollars of capital available directly to companies. Absent this capital, many of these companies would need to pursue a restructuring.
Patton: The emergence of new, risk-tolerant lending sources, including hedge funds, and the general availability of cheap capital and cheap debt are the primary sources behind the recent decline in corporate bankruptcy filings. Additionally, an increasing sophistication among lenders and the work-out community has lead to an increase in out-of-court restructurings.
Loughlin: The availability of capital looking for higher returns in a generally flat stock market and low interest rate environment appears to be driving the credit markets appetite for taking increasing levels of risk. The rapidly growing hedge funds are willing to provide capital to companies that would otherwise be forced to restructure today.
Glassman: A far greater percentage of the available capital is now managed by hedge funds, who bring a new dynamic to the market in that they are more nimble and make investment decisions much more quickly than other types of investors. The overall availability of financing has helped many ailing companies to survive, and those companies that operate on a leaner basis have been able to achieve strong investor returns and increase enterprise value in good times.
Pernick: Even banks, which in past years limited themselves to relatively ordinary and traditional loans, now have divisions that get involved in debt and equity transactions that are quite different from the traditional bank loans of the past.
Mayerson: There is no doubt that with so few deals around, competition among lenders is high. Many lenders are certainly willing to make riskier investments, and hedge funds are a strong example of this trend. In a low interest rate environment, with the abundance of