More Companies Need ‘Radical Surgery’ to Escape Distress, Proskauer Says

(Bloomberg) -- Vincent Indelicato, partner at law firm Proskauer Rose LLP, says the start of 2020 has been marked by an increase in companies filing for bankruptcy or pursuing other restructurings, after multiple efforts to stave it off through temporary solutions.

Indelicato, who is a member of the firm’s restructuring & bankruptcy practice, as well as its private credit restructuring group, spoke with Katherine Doherty on Feb. 25. Comments have been edited and condensed.

Are you seeing an uptick in restructurings?

While the macroeconomic environment of the last decade has been favorable to companies facing distress and we still find ourselves in the 12th inning of an economic recovery, restructuring activity has picked up at the start of 2020. Everyday seems to bring a new Chapter 11 filing. Behind the scenes, borrowers who have limped along, using the band-aid of forbearances and amendments, have started to concede they need radical surgery.

The question becomes, who is going to pay for the operation? Credits have reached a point in their life cycle where the next act is to restructure the balance sheet through a filing, and we expect that to continue.

Read more in the Credit Brief: Bond Titans Stay Cautious; Banks at the Abyss

How do market participants protect themselves from downside risk?

They have to do a 360-review of the capital structure to understand not just the identity and psychology of the stakeholders, but their rights. That involves an understanding of the documents. Historically lenders relied upon defaults to maintain visibility. But with the absence of covenants, lenders are coming to the table only to realize that it’s too late.

They’re getting a parent teacher conference, but it’s at the end of the semester when there’s no opportunity to take remedial steps to improve the student’s performance. It’s become more important to understand your rights and organize with other creditors sooner, rather than later, to initiate a dialogue with the company and sponsor.

What trends are you watching in the space?

Distressed investors are looking more and more for creative ways to deploy capital. They have exhibited a willingness to invest in esoteric trades, things like taxi medallions and litigation finance. Unlike the restructurings from the last cycle where creditors were fighting for their slice of the pie, distressed investors today have been keen to deploy legal strategies that might help them skip the line of other creditors. That has given shape to non-pro-rata share transactions and coercive rights offerings.

If you have size and capital in this late-cycle environment, you can drive an outcome. Because a lot of restructuring candidates today need capital to fund a restructuring of their balance sheet, inevitably they’ll gravitate to holders that can provide a solution, which often involves writing a check and providing the company with fresh capital to fund an emergence.

What might cause an increase in distress?

Recently the spread of coronavirus created the potential for global supply chain disruption and a dampening in consumer demand, which may lead to new areas of distress. As we assess and understand the reach of the contagion we’ll find ourselves with better visibility into the situation. Any company with global supply chain is one that has exposure. In terms of industries, it may impact oil and gas companies in the U.S. that depend upon demand from China.

To contact the reporter on this story: Katherine Doherty in New York at kdoherty23@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Molly Smith

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