US bankruptcies: Houston, we have a solution

US restructuring lawyers have to be tough. Houston’s summer humidity is just the start of the endurance test for them. The city’s federal court is a magnet for Chapter 11 bankruptcy, as filings from Diebold Nixdorf, Incora and GenesisCare demonstrated.

The chambers of the US Southern District of Texas has sophisticated judges and a taste for mind-bendingly complex cases.

The bankruptcy business is booming. Last month saw a surge in big cases involving companies with more than $500mn in liabilities. Three filings on the first day of June extended the trend.

Base rates are soaring and junk debt yields are normalising at double-digit levels. Companies such as supply chain manager Incora and point-of-sale group Diebold no longer have the luxury of kicking the can down the road. Painful reckonings are set to lock in losses for equity and junior capital holders.

Fitch Ratings earlier this week raised its 2023 default rate forecast for junk-rated loans and bonds to as much as 4.5 per cent and as much as 5 per cent, respectively. Bank of America now classifies $600bn of assets as “mildly” distressed. Analysts believe that most borrowers will recover. But if even a fraction default through bankruptcies or below-par exchanges, the aggregate losses will be meaningful.

Financing conditions were previously loose both in financing rates and covenant requirements. Clever lawyers and bankers designed increasingly exotic structures to keep troubled companies afloat. The Orwellian term adopted for such activities is “liability management”.

The failure of the gambit has spawned new jargon. The current crop of bankruptcies features pre-filed deals that set the terms of the reorganisation.

These so-called “restructuring support agreements”, evident for example in Diebold’s Chapter 11, hand ownership from existing owners to senior creditors. Prior owners are admitting the jig is finally up. The current wave of cases should wrap up by the time a fall chill is in the Houston air.