May 29, 2020

Scary Times for U.S. Companies Spell Boom for Restructuring Advisers

A restructuring can happen in out-of-court talks. But when a company’s debts are complex or the parties start vying over who will be paid first, the company may seek protection in bankruptcy court, where all the debts are renegotiated under the watch of a judge. In bankruptcy, the company would also seek new financing and a fresh start.

In anticipation of demand, many law firms are redirecting their lawyers into restructuring and bankruptcy-related assignments from other areas. Frank Aquila, a corporate attorney at Sullivan Cromwell who typically focuses on merger and acquisition work, said he’s been spending a lot of time with clients seeking to strengthen their cash position, either by reducing debt, selling assets or considering federal aid.

But Mr. Aquila and other advisers said that businesses generally prefer to work with banks rather than seek a government loan — especially if it means giving up the ability to buy back stock or dealing with restrictions on how the money can be used.

Michael C. Eisenband, a co-leader of corporate finance and restructuring at FTI Consulting, echoed the sentiment. “If you get $100 million, what happens when the company starts to turn around?” he said. “Do the first profits have to pay the government back first?”

Still, some companies — in particular, airlines — will get targeted relief from the $2.2 trillion economic lifeline bill that President Trump signed on Friday, and another $2 trillion that the Federal Reserve is using to keep the bond markets functioning properly.

Corporate failures are inevitable in the current crisis, especially given that there is $6 trillion in U.S. corporate debt that remains outstanding — near record levels. Particularly vulnerable is the $760 billion in junk bonds issued by U.S. companies, with $178 billion of that coming due over the next 12 months, according to Dealogic. Junk bonds pay investors higher interest rates.

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