The Changing Profile of Large Chapter 11 Cases
Most restructuring professionals would readily acknowledge that these are rather lean times for formal corporate restructurings and a challenging environment for the profession at large. Events of corporate debt defaults and large bankruptcies have been at lackluster levels for the better part of the last two years. S&P’s speculative-grade debt default rate finished 2013 at a cyclical low of just under 2% – less than one-half its long-term average – while the number of large corporate chapter 11 filings fell by 18% last year. Capital markets continue to bestow their largess on risky corporate borrowers, including many at the lower end of the ratings spectrum. But a closer, more focused look at the statistical data underlying these events, especially in comparison to the previous cyclical expansion, reveals a more nuanced story.
In fact, we found that the number of large chapter 11 filings over the last four years far exceeds accumulated totals in 2004-2007, the comparable prior period of economic expansion (see Exhibit 1). We noted 165 large chapter 11 filings in 2010- 2013 compared to 91 in 2004-2007, of which 118 and 77, respectively, have emerged from bankruptcy. (Note that 22 of 47 large cases that filed in 2013 are still pending resolution.) What is strikingly different when we compare summary statistics from these two periods is the duration and characteristics of these chapter 11 cases. Average case lengths in 2010-2013 fell by approximately one-half compared to the 2004-2007 period, with 45% of large chapter 11 cases emerging within 120 days of filing compared to just 17% for the previous period.
The sharp decline in case lengths is mostly attributable to the larger proportion of case filings considered to be prenegotiated/ pre-arranged or pre-packaged chapter 11 filings in the most recent four-year period. Some 45% of large filings were categorized as such compared to 21% in 2004-2007. The average duration of these “pre” cases was 107 days, a significantly lower figure than a traditional reorganization without a pre-negotiated plan.