Key Takeaways
- • FTI Consulting data show the 2023 distribution of bankruptcy filings by debtor size was consistent with annual averages since 2017, with roughly 55% of large filers in the $50 million to $250 million liability range (middle-market cases).
- • Capstone Partners' Brian Davies says private credit has changed borrower options, with lenders more willing to find solutions outside court, though covenant-light deals and scarce capital limit lenders' ability to force restructurings.
- • Proskauer's Vincent Indelicato reports a conspicuous uptick in restructuring activity entering 2024, with private equity sponsors approaching lenders and asking, 'Do you want the keys?'
- • Houlihan Lokey's Tuck Hardie warns that middle-market companies could lose 10% or more of enterprise value in a bankruptcy proceeding, and that creditors are increasingly demanding de-risking.
- • S&P Global data show 17.2% of the $15.96 billion in terminated Q4 2023 M&A deals involved private equity or venture capital firms, the highest quarterly proportion since 2020.
Summary
After a widely anticipated wave of bankruptcies and restructurings failed to fully materialize in 2023, early 2024 shows signs that the wave may be starting to crest, according to advisers interviewed by ai-cio.com. At the start of 2023 many firms expanded their restructuring teams, but bankers were willing to extend and amend financing where a business appeared to have a path forward. FTI Consulting's analysis found the distribution of filings by debtor size in 2023 consistent with annual averages since 2017, excluding the outlier year 2020. Brian Davies, a managing partner at Capstone Partners, said he did not add headcount to his team, partly because private credit has given borrowers more financing options and given private lenders room to find solutions during difficulties rather than forcing bankruptcy. He noted that lenders are holding assets because capital is harder to redeploy, and that competitive lending and covenant-light deal structures make it difficult to force restructurings.
The picture may be shifting in 2024. The year opened with several high-profile filings, including Signa Group and Diamond Sports. Vincent Indelicato, global co-head of Proskauer Rose's business solutions, governance, restructuring and bankruptcy group, said restructuring professionals have seen a conspicuous uptick in activity, and that some private equity sponsors, having run out of options for portfolio companies, are approaching lenders about handing over control. Indelicato said parties still prefer out-of-court workouts where possible, though unexpired leases or labor agreements may require bankruptcy tools.
Challenges ahead include the likelihood that businesses that extended and amended through the past three years are running out of runway, and may lack the equity needed for refinancing. Tuck Hardie, managing director at Houlihan Lokey, said creditors are increasingly demanding de-risking through equity contributions, accretive asset sales or debt-to-equity conversions, and that many loans maturing in 2024 and 2025 were written at much lower rates. Pressure is expected to be most acute in the middle market, where private credit activity is concentrated. Davies added that few unencumbered assets remain to provide restructuring financing. Hardie estimated middle-market companies could lose 10% or more of enterprise value in bankruptcy. Nate McOmber of G2 Capital Advisors reported rising demand for fiduciary services and a shortage of experienced restructuring talent.
S&P Global data show terminated M&A deals totaled $15.96 billion across 29 transactions in Q4 2023, a low figure historically, but 17.2% involved private equity or venture capital firms. Investors may face difficulty recovering capital from PE managers in a slow M&A market, particularly where portfolio denominator effects persist. FTI Consulting also warned that the speculative-grade default rate may become a less representative proxy for large corporate failure, as non-bank lenders often skip full rating agency evaluations. Hardie cautioned that managers' temptation to finance distressed companies could add risk, citing debt deals completed at leverage levels that raise concerns.
The picture may be shifting in 2024. The year opened with several high-profile filings, including Signa Group and Diamond Sports. Vincent Indelicato, global co-head of Proskauer Rose's business solutions, governance, restructuring and bankruptcy group, said restructuring professionals have seen a conspicuous uptick in activity, and that some private equity sponsors, having run out of options for portfolio companies, are approaching lenders about handing over control. Indelicato said parties still prefer out-of-court workouts where possible, though unexpired leases or labor agreements may require bankruptcy tools.
Challenges ahead include the likelihood that businesses that extended and amended through the past three years are running out of runway, and may lack the equity needed for refinancing. Tuck Hardie, managing director at Houlihan Lokey, said creditors are increasingly demanding de-risking through equity contributions, accretive asset sales or debt-to-equity conversions, and that many loans maturing in 2024 and 2025 were written at much lower rates. Pressure is expected to be most acute in the middle market, where private credit activity is concentrated. Davies added that few unencumbered assets remain to provide restructuring financing. Hardie estimated middle-market companies could lose 10% or more of enterprise value in bankruptcy. Nate McOmber of G2 Capital Advisors reported rising demand for fiduciary services and a shortage of experienced restructuring talent.
S&P Global data show terminated M&A deals totaled $15.96 billion across 29 transactions in Q4 2023, a low figure historically, but 17.2% involved private equity or venture capital firms. Investors may face difficulty recovering capital from PE managers in a slow M&A market, particularly where portfolio denominator effects persist. FTI Consulting also warned that the speculative-grade default rate may become a less representative proxy for large corporate failure, as non-bank lenders often skip full rating agency evaluations. Hardie cautioned that managers' temptation to finance distressed companies could add risk, citing debt deals completed at leverage levels that raise concerns.
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