Bond defaults deliver 99% losses in new era of U.S. bankruptcies


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Investors that bought a J. Crew Group Inc. term loan at par back in 2014 may have thought they were making a relatively safe bet, since it was secured debt. When the company started struggling a few years later, it moved intellectual property including its brand name into a new entity, a move enabled by relatively loose covenants.

A J. Crew store in New York in May.
A J. Crew store in New York in May. Photo by Nina Westervelt/Bloomberg files

The company then exchanged some of its existing bonds for new notes secured by the intellectual property as well as preferred stock and equity in its parent company, as part of a broad restructuring. Loan investors ended up suffering: after the company filed for bankruptcy in May, the 2014 obligation was worth less than 50 cents on the dollar, according to Bloomberg loan valuation estimates. (J. Crew exited bankruptcy in September.)

FTI’s Khemlani, who advises lenders with senior claims on borrowers’ assets, said investors should make an effort to “put some teeth” into their agreements with borrowers now as they fall into distress, regaining some lost protection.

In addition to shifting assets, companies have also been doing more distressed exchanges in recent years, where troubled corporations offer creditors new debt that often ranks higher in the repayment pecking order in exchange for relief like lower principal or later maturities or both. Creditors that participate can stem their losses in the event of a bankruptcy, but investors that sit the deal out can end up worse off.

The popularity of distressed exchanges has also contributed to a general rise in secured debt in companies’ capital structures. That means that more investors — holders of loans and secured bonds — are fighting for the same scraps when a company files for bankruptcy. Almost 20 per cent of the debt in the U.S. high-yield bond market is now in some way secured, according to Barclays, versus just 6 per cent in 2000. The number of businesses that had taken out just loans and no other form of debt almost doubled between 2013 and 2017, according to JPMorgan Chase & Co. data.

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