Bankruptcy/Chapter 11 / Bonds / Post-Bankruptcy Stocks

2017 Bankruptcy Review & 2018 Distressed Debt Forecast

The growth in bankruptcy activity that we’ve seen over the last few years paused somewhat in 2017. As shown in the table below, the number of publicly traded companies filing for bankruptcy this past year dipped to 70 from 99 in 2016.  However, the total assets of public companies going into Chapters 7 and 11 during 2017 actually rose slightly to almost $107 billion from $104 billion the year before.  This may have been skewed somewhat by the fact that some of the largest 2017 filers arguably were financial services companies (which we typically exclude from our totals because they show huge assets on their balance sheets), but the numbers nonetheless reflect a continued high level of filings by large companies. 

Public Bankruptcies: 2008 - 2017

Year

# of Companies

Assets*
($Mil.)

2008

125

65,028

2009

165

344,506

2010

85

22,099

2011

82

58,256

2012

80

44,401

2013

67

33,108

2014

54

71,918

2015

79

76,903

2016

99

104,665

2017**

70

106,929

*Aggregate of total pre-filing assets of all
publicly-traded companies filing for bankruptcy (this includes both Chapter 7 & 11).

** Through 12/26/2017

Source: BankruptcyData

While Chapter 11 activity in the energy and mining sectors remained significant in 2017, it no longer dominated the bankruptcy world the way it did in 2016.  This past year there were only four energy or mining companies among the ten largest Chapter 11 filings, compared to eight of the top ten in 2016 (or nine of the top ten if you include a solar energy company). 

Interestingly, the largest bankruptcy of 2017 wasn’t by a company, and technically might not even be a “bankruptcy.”  When the Commonwealth of Puerto Rico defaulted with a total estimated $73 billion of debt earlier this year, it wasn’t eligible to seek protection under the U.S. Bankruptcy Code because that law doesn’t cover unincorporated territories.  Instead, Congress passed a special statute called the Puerto Rico Oversight, Management, and Economic Stability Act (sometimes known as “PROMESA”) to provide judicial oversight for the restructuring of the island’s debt. 

Looking ahead, we expect corporate bankruptcy activity to remain at a high level for at least the next few years.  Much of the unprecedented amount of debt that has been raised during the exuberant markets since 2009 comes due soon.  Roughly $1.5 trillion dollars of lower quality corporate debt (a combination of high yield bonds and so-called “leveraged” bank loans) comes due over the next five years.  Even if the debt markets stay strong, some small percentage of that debt will need to be restructured, much of that through Chapter 11.  If the debt markets get more selective, a larger percentage of the maturing debt will not be able to be refinanced, leading to even more bankruptcies.

If we are correct and the pace of defaults pick up, this will create a wealth of opportunities for distressed debt investors.  Also, the large number of companies, particularly energy companies, emerging from Chapter 11 has created interesting opportunities in post-reorganization stocks. 

Finally, Puerto Rico’s debt is beginning to look attractive, as some issues have fallen to 20 or 30 cents on the dollar or below.  It is a complicated and risky situation for at least three reasons: 1) there are quite a few different types of Puerto Rican bonds outstanding, many of which have competing claims on the same limited pool of assets; 2) the restructuring is governed by a new and untested law and 3) the island’s economy remains in shambles after being battered by two hurricanes last fall.  All that said, our best guess is that at least some of the Puerto Rican debt could provide substantial rewards to investors willing to take on those risks. 

Largest Bankruptcies of 20171

Company

Assets($Mil.)

Filing Date

Seadrill Limited

21,666

9/12/17

Walter Investment Mgmt. Corp.

16,759

11/30/17

Toys “R” Us, Inc.

6,908

9/19/17

Avaya, Inc.

6,862

1/19/17

Pacific Drilling S.A.

5,998

11/12/17

J.G. Wentworth Co., The

4,993

12/12/17

Tidewater, Inc.

4,991

5/17/17

GenOn Energy, Inc.

4,860

6/14/17

First NBC Bank Holding Co.

4,706

5/11/17

Memorial Production Prtnrs, L.P.

2,906

1/16/17

Vanguard Natural Resources, LLC

2,709

2/1/17

Cumulus Media, Inc.

2,413

11/29/17

1 Through 12/26/2017

2 Assets at fiscal year-end prior to filing

Source: BankruptcyData

Disclosure Note: Accounts managed by an affiliate of the Publisher own certain Puerto Rican bonds.