Commentary: Congress Must Increase Small Biz Chapter 11 Debt Cap*​​​

The bipartisan 2024 Bankruptcy Threshold Adjustment and Technical Corrections Act, dubbed S. 4150, was introduced in the Senate on April 17 and aimed to extend the $7.5 million debt limit for Subchapter V bankruptcy for another two years, but it has not been passed. After months of uncertainty, the maximum debt threshold to qualify reverted from $7.5 million to $3,024,725 on June 21. The change in the law signifies that thousands of small businesses that would have been potentially able to use Subchapter V as a means of reorganization may no longer do so if their debts exceed the far-lower threshold of $3,024,725. The bipartisan S. 4150 unfortunately fell victim to politics and the timing of an election year. However, all hope is not lost, according to a Law360 commentary. On July 11, Sen. Dick Durbin, D-Ill., a co-sponsor of the 2024 Bankruptcy Threshold Adjustment and Technical Corrections Act, submitted a proposed amendment to a U.S. Department of Defense military spending bill that would modify the Bankruptcy Threshold Adjustment and Technical Corrections Act to provide for an additional two-year extension of the $7.5 million debt threshold, until June 20, 2026. The bill would also have retroactive application to apply to any bankruptcy case filed on or after July 21. Hopefully, Congress will allow the bill to proceed, and the measure will pass and be signed into law, according to the commentary. Subchapter V has been working extremely well, and the thousands of small businesses that would be affected by the law deserve a chance to reorganize successfully. Read more. (Subscription required.)

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Note: ABI is continuing its study of Subchapter V, and it needs your help! We are particularly interested in learning more about the real-world impact of Subchapter V. So our question is, do you have a story about a distressed business or creditor who has used or benefitted from the subchapter? If so, could that case still happen under the lower debt cap for Subchapter V debtors? Any and all responses are welcome. Submit your story at https://abi.org/subvstories.
 

Analysis: Restructuring Becomes Pit Stop to Bankruptcy for Risky Borrowers​​​

Robertshaw, a troubled appliance partmaker, cut two controversial financing deals last year to try to keep itself afloat. Then this year, it filed for bankruptcy anyway. That’s becoming a pattern, according to one analysis by Bank of America: When companies get contentious financings that give special treatment to a handful of their creditors, they still default again about 40% of the time, according to a Bloomberg News analysis. The financings not only pit lenders against each other and cut into recoveries, they sometimes trigger litigation. In an economic landscape that could worsen, many investors are saying that these so-called liability-management exercises are a bad deal in contrast to filing for bankruptcy and undergoing a more comprehensive restructuring. “When you have a problem with an enterprise, wasting time is value-destroying,” said Dan Zwirn, chief executive officer at Arena Investors. “Recoveries go down. It might be accretive to marks in the short term — whether that’s the loans, bonds or equity — but it’s ultimately value-destructive.” For investors left out of these deals, investments can turn sour quickly. In one July analysis of the deals, senior debt in capital structures often underperformed more junior debt in the aftermath of liability management, Barclays Plc strategists found. The trouble with these financings is only growing. This year, there has been at least $24 billion of debt that has been exchanged by distressed companies looking to fix themselves, one of the most active years for this activity since 2008, according to a report from JPMorgan Chase & Co. Read more.
 

Office Loans Are Toxic, but Apartment Loans Are in Bad Shape, Too​​​

“Survive until 25” has become a mantra for landlords who are hanging onto buildings by their fingernails and praying for rate cuts soon. While it is well understood that many offices are a lost cause, apartment loans are in surprisingly bad shape, too, according to a Wall Street Journal analysis. More than $40 billion of office loans were in distress at the end of the second quarter based on data from MSCI, which is around three times the value of distressed apartment loans. But the pool of apartment mortgages that could get into difficulty in the future is larger: $56.9 billion is at risk of distress, compared with $50.9 billion for offices. These loans are flashing amber because occupancy rates are falling or the income generated by the buildings is barely enough to meet interest payments, says Alexis Maltin, a vice president at MSCI Research. One of the rockiest corners of the real estate lending market is a niche product that apartment flippers gorged on during the pandemic. The distress rate on commercial real estate collateralized loan obligations, or CRE CLOs, reached 10.8% in July, data released by CRED iQ on Monday show. This includes any loan 30 days delinquent, past its maturity or in special servicing where a third party tries to work out the best outcome for the troubled loan. There is around $75 billion of CRE CLO debt outstanding, so it is a small part of overall lending. The debt is riskier than commercial mortgage-backed securities or bank mortgages, as they are floating-rate bridge loans for properties that need to be renovated before they can be leased out. As such, there is more uncertainty about where the rental income will ultimately settle and often a dose of wishful thinking in the loan underwriting. Read more. (Subscription required.)

U.S. Initial Jobless Claims Decline by Most in Nearly a Year​​​

Initial applications for U.S. unemployment benefits fell last week by the most in nearly a year, potentially alleviating some concerns that the labor market is cooling too fast following last week’s disappointing jobs report, Bloomberg News reported. Initial claims decreased by 17,000 to 233,000 in the week ended Aug. 3, according to Labor Department data released Thursday. That was helped by fewer applications in states that had registered large increases in recent weeks, such as Michigan, Missouri and Texas. Continuing claims, a proxy for the number of people receiving unemployment benefits, edged up to 1.88 million in the week ended July 27, according to Labor Department data released today. While both initial and continuing applications for unemployment benefits have trended higher this year, they’re still hovering around 2019 levels. Initial claims, before adjustment for seasonal factors, dropped by around 13,600 to 203,054, the lowest since May. Claims in Texas have subsided recently after spiking when Hurricane Beryl made landfall in early July, but the effects of Hurricane Debby on the Southeast may surface in next week’s data. Read more.
 

Private Equity Builds $722 Billion War Chest in Hunt for Deals​​​

The biggest publicly traded alternative-asset managers have more than a half-trillion dollars to put to work — and they’re gearing up for a deals comeback. Seven of the firms reported a collective $722 billion in dry powder as of June 30 — a 9% increase from a year earlier, according to earnings data compiled by Bloomberg. Now that the Federal Reserve is expected to cut interest rates, money managers have extra firepower to make deals again. “The macro, inflation and rates backdrop has improved, markets are open — and the deal market is back,” KKR & Co. Co-Chief Executive Officer Scott Nuttall said on the firm’s second-quarter earnings call. Dealmaking dried up in the past couple of years as the high cost of debt spurred would-be buyers to retreat. That also limited new opportunities to finance acquisitions, a key area of business for big diversified asset-managers such as Ares Management Corp. Distributions to paid-in capital — a measure of capital returned to investors — remain low amid a lack of exits, and firms face growing pressure from investors in older funds who want their cash back. Some dealmakers took the opportunity to tout this week’s market rout as a ripe moment to swoop in. “Although the markets have clearly become far more volatile since late last week, it’s not yet clear how this may impact the underlying economy,” TPG Inc. Chief Executive Officer Jon Winkelried said on the firm’s earnings call Tuesday. “We know periods of market dislocation create compelling investment opportunities.” Read more.
 

Latest "Party in Interest" Podcast Features Prof. Melissa Jacoby of UNC Chapel Hill​​​

The latest episode of ABI's "Party in Interest" podcast features ABI Executive Director Amy Quackenboss talking with Melissa B. Jacoby, the Graham Kenan Professor of Law at the University of North Carolina at Chapel Hill and soon to be a visiting professor at Harvard Law School in the fall. ABI’s Resident Scholar for the spring 2016 semester, Prof. Jacoby recently released her first book, Unjust Debts, which received a starred review from Publisher’s Weekly and made the Financial Times’ best economics books list. Click here to listen.
 

Nomination Deadline is Sept. 6 for ABI's International Matter of the Year Award!

ABI’s International Committee is accepting nominations for its Third Annual ABI International Matter of the Year Award. For criteria, eligibility and other information on the award, please click here.

All nominations must be received by Sept. 6.
 

Get Your Copy of The Purdue Papers — Now Updated with the Supreme Court’s Ruling!​​​

The Purdue Pharma L.P. case, overturned at the end of June by the U.S. Supreme Court, generated a mountain of commentary in the form of amicus briefs, petitions and other related background material. Guided by editor David R. Kuney (who represented one group of amicus filers), ABI has gathered together all of this material in a fully searchable form — more than 3,500 pages worth! This digital book includes the final Supreme Court decision, a commentary by ABI Editor-at-Large Bill Rochelle, and a transcript of ABI’s July 2 webinar discussing the implications of the decision. It’s an invaluable resource for anyone working in the area of third-party releases, whether as a practitioner, an academic or just an interested party. Get your digital copy for only $25!

Pick Up Your Copy of Driving the Recovery Bus​​​

Make sure to pick up your copy of Driving the Recovery Bus: Augmenting Creditor Recoveries Through Claims Brought by a Litigation Trustee. Written by Gordon Z. Novod, this book is not only for litigation trustees, but also for creditors who serve on official committees of unsecured creditors, attorneys and other professionals who frequently represent official committees of unsecured creditors, and others with a general interest in the pursuit of causes of action by litigation trustees. Get your copy of Driving the Recovery Bus. 
 

Have an Idea for a Topic for an ABI Conference Session? Submit Your Proposal via ABI’s “Call for Abstracts” Page!​​​

ABI has launched an online portal for professionals to submit proposals for educational sessions at future ABI conferences. Submitters can describe their proposed topic, outline the session’s focus and learning goals, suggest speakers, and provide contact information via the portal’s detailed form. The portal can be accessed here.

All submissions will be reviewed by an internal Education Committee, which will contact the submitter to ask questions as needed and to discuss the status of the proposal. Submissions will be reviewed on a rolling basis.

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