“Up over 25% from one year ago.”
It starts like this: Reuters reports that “sources” said that a company has hired “restructuring lawyers.” A sign of an impending debt restructuring, such as a bankruptcy. And shares plunge.
This is what happened Monday morning to Chesapeake Energy, the second largest natural gas producer in the US, after it was reported that it had engaged restructuring advisors Kirkland & Ellis. Shares, already reduced to near-penny-stock territory, plunged another 50% to $1.50, at which point trading was halted.
To soothe our rattled nerves, the company said that it “currently [emphasis mine] has no plans to pursue bankruptcy and is aggressively seeking to maximize value for all shareholders.”
As of September 30, after losing nearly $5 billion in the quarter, Chesapeake had $16.7 billion in liabilities, including $10.7 billion in long-term debt, mostly bonds. It has $1.8 billion in cash. In addition to its operating requirements (losses), the company has to deal with $500 million in debt that comes due in March. OK, that might still work. But it also has commitments to pay about $2 billion per year for space on a number of pipelines, including those owned by Williams Companies, whose shares plunged 34.8% upon the news.
Throughout the energy bust, the meme has been bandied about that pipeline companies were immune to the energy depression. They’re getting paid for transporting oil or gas, they don’t care how low prices are. So the meme. Now they care.
After the company’s announcement that it “currently” has no plans to file for bankruptcy, shares jumped back up to $2.04 in a bout of short-covering but remained down 33.3% for the day.
Now some folks are going to make some serious nearly risk-free money. But it won’t be the existing shareholders or bondholders. Rather, it will be at their expense.
And this business is booming, according to Houlihan Lokey, “The No. 1 global investment banking restructuring advisor,” as its website proclaims. Over the past decade, it advised “on more than 1,000 restructuring transactions, in- and often out-of-court, with aggregate debt claims in excess of $1.5 trillion, including four of the five largest of all time: Lehman Brothers, WorldCom, General Motors, and CIT Group.”
Ah, the sweet sound of familiar names.
There had been a big slowdown of work in the bankruptcy segment after the Fed bailed out Corporate America with its emergency loan facilities during the Financial Crisis, and after QE, and the ensuing search for yield, made so much cheap money available that even teetering companies with endless losses could always get new money from “systemically blind investors,” as we’ve come to call them.
But now the restructuring and bankruptcy business is booming once again as frazzled banks and newly seeing investors are turning off the money spigot for the riskiest and most over-indebted companies.
Houlihan Lokey, which went public last August as the boom in bankruptcies and restructurings got kicked off in earnest, reported Monday evening that fourth-quarter revenues rose 4.6% to $206 million, one of the relatively few US companies to show an increase in revenues these days, powered by one of its business lines: advising on debt restructurings and bankruptcies.
During the earnings call, CEO Scott Beiser pointed out that issuance of leveraged loans and junk bonds “has recently slowed” — perhaps the understatement of the year — and that this lack of new money is “potentially impacting future opportunities for companies in need of refinancings.”
So they might no longer be able to sell new debt to pay off maturing debts and make interest payments on existing debts.
How hard, or how expensive, is it for risky companies to issue bonds? S&P Capital IQ LCD reported that Monday afternoon Manitowoc Cranes was able to hammer out the terms on a bond deal that is part of its spin-off of its Manitowoc Foodservice division. With junk ratings of B+/B1, the $260 million second-lien notes that mature in 2021 sold at a yield of 14%!
That’s expensive money!
But if a company is unable to issue new debt at survivable rates to pay its obligations, then it may have to restructure its debt in bankruptcy court. Among the “growing pockets of distress” weren’t just energy companies, Beiser said, but also retailers that had trouble with the relentless shift to online shopping. He added:
“Our total number of active restructuring engagements as of December 31, 2015, is now the highest since the Great Recession, and up over 25% from one year ago.”
“While the recent growth trends are significant, to date, most of these new mandates reflect mid-cap-size debt levels. We still have not experienced the extraordinary large-size restructurings like we saw in the last economic downturn.”
So the big wales have yet to wash up on the beach. Now everyone is keeping their binoculars trained on the horizon, chattering about those that might wash up, something like Chesapeake or even bigger.
There’s a lot of money involved. Beyond bankruptcy and restructuring advisors are the bankruptcy lawyers. So the Wall Street Journal examined “dozens of bankruptcy filings” to get an idea about the hourly billing rates and found this:
The filings, made in some of the largest chapter 11 cases filed last year, show that many senior partners billed between $1,200 and $1,300 per hour, with some approaching $1,400. Some firms have recently increased their maximum partner rates to approach $1,500 per hour, while a few star lawyers can command close to $2,000 per hour.
This money comes out of stockholders’ and creditors’ pockets who will often get wiped out in the process. There is always an opportunity somewhere!
But this assumes that the cycle is allowed to run its course, that the cleansing of the excesses and the essential destruction of excess debt – other people’s assets – are allowed to move forward with all their consequence. The risk of failure and loss, and actual failure and loss, are the best regulators with the biggest teeth out there. But that wasn’t allowed to happen last time. The Fed and the government quashed that regulator. Hence the huge overhand this time.
So watch the banks. Read… Whiff of Panic? Global Bear-Market Progress Report
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.