January 2025: Recent Developments in the Realm of Bankruptcy and Restructuring

In an effort to keep you apprised of what’s happening in the realm of bankruptcy and restructuring, here are several recent developments to be aware of.

1. Corporate bankruptcy filings in the US have hit a 14-year high, reaching the largest total since the aftermath of the Great Recession. S&P Global Market Intelligence reports there were 694 bankruptcies by certain public and private companies in 2024, far surpassing the 2023 total of 635 filings and extending a trend that had been growing for months.

2. Consumer discretionary, particularly the retail and restaurant industries, was the most significant sector driving this trend. Big Lots, Express, Joann, Red Lobster, TGI Fridays, and TrueValue were among the biggest household names that filed for bankruptcy last year. The S&P’s data shows the industrial and healthcare sectors had the second- and third-highest bankruptcy totals, respectively. One hurdle common for many companies in these top sectors is a large number of commercial real estate leases dragging down profitability. Since Chapter 11 allows a company to reject undesirable leases, filing for bankruptcy can be an attractive solution.

3. Liability management exercises (a transaction or series of transactions designed to modify a company's debt obligations outside of a formal court-supervised restructuring) have become increasingly common in recent years. However, their effectiveness at helping companies turn things around isn't clear. According to S&P Global Intelligence, among 38 loan liability management transactions executed by 35 companies between mid-2017 and August 2024, 37% of the companies ultimately filed for bankruptcy despite these efforts. Of the remaining companies that avoided bankruptcy, only five (14%) successfully staved off a subsequent default and maintained ratings above CCC+.

4. Speaking of LMEs, the Fifth Circuit Court of Appeals recent ruling in the Serta Simmons case may significantly impact leveraged market exchanges (LMEs). The court invalidated Serta's 2020 uptier exchange, which had given certain lenders the opportunity to swap their existing debt for new debt with higher priority, while excluding other lenders from participating. Notably, the court determined that the credit agreement's "open market purchase" provisions required genuine open market transactions, rather than selective private arrangements with specific lenders.