Mid-Year Chapter 11 Bankruptcy Update: From One Extreme To The Other

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Submitted by George Putnam, III as part of our contributors program.

Mid-Year Chapter 11 Bankruptcy Update: From One Extreme To The Other

Over the course of the first half of the year, we’ve seen one of the slowest periods for large bankruptcy filings in recent memory, as well as one of the busiest. Beginning in December 2013 and running until early February 2014 there were no public companies filing for bankruptcy, which is unprecedented over the last several decades. Then in March and April, eleven public companies, all of which had assets in excess of $300 million, filed for Chapter 11 bankruptcy, culminating with the massive ($41 billion in assets) filing by Energy Future Holdings on April 29. This flurry of activity ended rather abruptly, and May and June saw few additional filings.

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Despite these extreme periods, when you look at the half year as a whole, it looks fairly similar to the last several years. Fewer companies filed in the first half of 2014 than in comparable periods of previous years, but they had more assets–largely as a result of the Energy Future Holdings bankruptcy.

Energy Future Holdings, which was formerly known as Texas Utilities or TXU, could be one of the more interesting bankruptcies of the last decade. The company was the subject of the largest leveraged buyout in history in 2007, which saddled the company with at least 66 classes of debt spread out over several different entities, both regulated and unregulated.

There are a number of major investment firms currently jockeying for position across the capital structure. Because of this intense scrutiny from professional distressed securities investors, many of the bonds have moved up quite a bit since the bankruptcy filing, and so there aren’t any obvious bargains right now in any of the Energy Future bonds (and it has no publicly traded stock). But if the bankruptcy drags on for a while, it could create “bondholder fatigue” and push some securities down to interesting levels. We still believe that bankruptcy filings will pick up in the not-too-distant future. While the balance sheets of most of corporate America are in relatively good shape, there are still quite a few companies that are overleveraged–some because of debt issued before 2008 and others because of debt raised in the recent high yield boom–and we expect many of them to be forced to restructure over the next few years.