US bankruptcies: easy capital is a drug that induces myopia

Kick a can down a road for long enough and fatigue ends the game. On Monday, several prominent, distressed US companies finally succumbed to bankruptcy. They included Vice Media and Envision Healthcare, whose backers included some of the world’s best-known investors. 

The court filings are instructive. Documents not only detailed how these companies kept running out of money. They also showed that bad business models were no bar to raising more money that would itself be lost.

Just a year ago, Envision took in more than $1bn in fresh cash. Since 2020, Vice garnered at least $200mn, despite zombie-like characteristics.

Wishful thinking surrounding those deals was predicated upon low interest rates, rising valuations and miracle turnrounds in profitability that never materialised. 

The chunks of capital will mostly be incinerated. Only senior secured lenders will receive some recoveries, predominantly in risky equity with some cash thrown in.

The curse of raising money from investors is that you then need to spend it. In go-go eras, it proves difficult to avoid going with the flow. In the instance of Vice and Envision, new money investments made as the businesses faltered typically had some seniority in the capital structure and received higher interest rates. Such terms are a double-edged sword that can inflict serious damage on a troubled enterprise. 

Senior lender Fortress Investment Group is set to acquire Vice. The deal values the company at under $300mn. Almost a decade ago, when Vice was seen as a hot, disruptive magazine publisher, it raised equity at a valuation close to $5bn.

Envision, which comprises physician practices and surgical centres, will not take such a sharp haircut. It is perhaps worth half the value of its $10bn 2018 buyout.

Investors can learn from this. Cash calls too often forestall hard operational choices, when the latter could preserve more value in the long run. Easy capital is a powerful drug. Its side effects include myopia.