Beware of the Killer B's

It may not have felt like it, but 2019 was the second-best year of the decade with respect to the number of rated debt defaults and large Chapter 11 filings, trailing only 2016. Large bankruptcy filings increased by 20% last year while S&P rated debt defaults increased by 43% over a quiet 2018. Nobody would call 2019 a gangbuster year for restructuring activity, but in a year when financial markets rallied so fiercely, we’ll gladly take it.

Last year we devoted several columns to the disconnect between the performance of financial markets, corporate operating results and U.S. macroeconomic conditions. This widening disparity is largely attributable to the Fed’s abrupt reversal on monetary policy in early 2019, three subsequent reductions to the Fed Funds target rate, and the Fed’s renewed balance sheet expansion (don’t call it “quantitative easing,” insists Fed Chair Powell) later in the year to stabilize the repo market — all of which stoked late-cycle risk-taking activities by investors and lenders but had more muted effects on the corporate sector and the real economy. Most business folks recognize that the U.S. economy is not nearly as strong or invulnerable as major market indexes would imply, and robust levels of restructuring activity in 2019 support that assertion. 

So, what’s in store for 2020? We believe that restructuring activity will continue to pick up pace even without a recession.