Kicking the Can Down the Road to Bankruptcy

All those fancy financial tricks that companies use to avoid bankruptcy are mostly just buying them time before an inevitable crash. Harvard and Oxford researchers looked at 89 of these "creditor-on-creditor violence" deals and found that over 80% of companies still defaulted within three years anyway.

Here's the basic setup: struggling companies go to their biggest lenders and say, "give us more money and we'll pay you back first," while essentially screwing over the smaller creditors and making their investments worthless. It's gotten popular because companies have been loaded up with loose lending terms since the financial crisis and private equity firms really don't want to end up in bankruptcy court where judges slash company values and wipe out their investments. Can you blame them?

Sure, there are some success stories - PetSmart spun off Chewy in 2018 and it became worth $40 billion, enough to pay back all their debt. Companies like Carvana and EchoStar also pulled off amazing turnarounds. But these are like lottery wins. Most companies just pile on more expensive debt they can't handle.

The proof is in the numbers: senior loans used to recover 75 cents on the dollar, but with all these messy restructurings, that's dropped to just 57 cents. Saks is a perfect example - they raised $600 million in June, filed for bankruptcy seven months later and the creditors who gave them that money are now looking at less than five cents on the dollar. Oucheroo!

What's really sketchy is how much the advisers are making off this. Law firms and investment banks can potentially get paid twice: once for the initial deal and again when it falls apart and needs expensive litigation. Lumen Technologies spent over $400 million just on fees for their refinancing.

The researchers' bottom line is pretty simple: instead of these financial gymnastics that usually fail anyway, companies would probably be better off just going straight to bankruptcy court where they can actually fix their real problems, even if it means taking some immediate losses. Will these companies stop choosing violence? Stay tuned…

#Distressed