Lenders to deeply distressed companies are calling the shots in big corporate bankruptcies so far in advance that some cases are practically over before they get started, according to a Bloomberg News analysis. Investment firms and hedge funds are increasingly engineering bankruptcy loans and side deals to take control of chapter 11 reorganizations from the outset. They’re putting up desperately needed funds to keep the targets in business -- but often only after crafting terms that lock in rich rewards for themselves while potentially locking out rivals and lower-ranking creditors. The trend is sure to speed up cases, but it also forces judges to make quick decisions that may shortchange some valid claims. It’s a stark departure from older norms, when a troubled firm fell into chapter 11 and huddled with creditors -- overseen by a federal judge -- on a plan to repay debts in a way that was relatively transparent. In recent cases like J. Crew Group Inc., key features of bankruptcy exit plans were designed well ahead of the filing itself, out of view of the court and swaths of creditors. Similar tales are playing out in other large corporate bankruptcies. From 1995 to 2005, just 10 percent of bankruptcy loans made to publicly traded firms were linked to a specific chapter 11 exit plan, according to a working paper from Kenneth Ayotte of UC Berkeley and Jared Ellias of UC Hastings. From 2015 to 2018, the number soared to 50 percent. JCPenney Co., a U.S. retailer that went bankrupt early in the Covid-19 pandemic, entered chapter 11 with a deal in place for $900 million in debtor-in-possession financing. The catch: the JCPenney debt-holders funding it -- hedge funds included -- required tight deadlines for the restructuring, veto power over the process, a hefty interest rate and fresh legal protections for their existing holdings. Complaints poured in. One creditor group called the financing “predatory,” and another, its lowest-ranking creditors, likened it to a robbery. U.S. Bankruptcy Judge David Jones said that the deal contained “an awful lot that you look at and you just don’t like.” But where else would JCPenney get the money needed to avoid liquidation? Judge Jones approved the loan, and the department store chain’s stores emerged from bankruptcy about seven months after it sought court protection. Those bankruptcy lenders -- a group that as of Aug. 10 included H/2 Capital Partners, Silver Point Capital and Brigade Capital Management -- are now set to become the owners of most of JCPenney’s real estate holdings. Rebutting the attacks from other creditors, the lenders argued in court papers that their financing was the best deal available.
