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Even though stock markets have been retreating all year, financial conditions have only tightened markedly of late. The result is that several companies facing a cash or supply chain crunch have not so easily been able to raise fresh rescue capital, money that would have flowed easily at most any point in the last decade, according to a commentary in yesterday's Financial Times. Lacking liquidity, the likes of Revlon, Scandinavian Airlines and Voyager Digital have been recently forced to hastily file for chapter 11 bankruptcy. Their court papers have described just how quickly distress overwhelmed them, providing evidence on how quickly a recession may be approaching. As for the bankruptcy cases themselves, expect many of them to be intrinsically compelling. Years of low interest rates after the financial crisis inspired all sorts of financial engineering and, in the case of cryptocurrency, a new financial paradigm all together. Much of that innovation was not fully understood at the time but will have to be untangled now with lawyers and judges, according to the commentary. At the end of May, a distressed debt ratio calculated by S&P showed that under 3 per cent of the corporate credit securities it tracked were trading with yields greater than 10 percentage points above US Treasuries, indicating elevated default risk. By the first week of July, the ratio was at nearly 9 percent. The effective yield for the lowest-rated category of junk bonds tracked by Intercontinental Exchange and Bank of America is now 15 percent, more than double a year ago. The higher cost of debt is indicative of just how scarce capital has become. Multiple investors pointed to Avaya, the telecom hardware company that recently borrowed $350mn in the form of a senior secured loan at an annual whopping 15 percent cost. One hedge fund executive said that with the broad sell-off in risk assets recently, there was enough dislocation in the debt of high-quality companies, there was little need to take a chance on the dregs. The Swedish air carrier SAS found this out the hard way. The company, in the midst of a labour stoppage, filed for bankruptcy in New York without agreeing to subsequent financing or a revised deal with aircraft lessors. Companies that do file for bankruptcy often prefer to have a deal with creditors in place in order to quickly exit the process. Similarly, the cosmetics maker Revlon filed for bankruptcy when negotiations with creditors for an out-of-court deal fell short just as its suppliers increasingly were hesitant to deal with the troubled company. The company had raised $880mn of cash in 2020 to avoid going under in the midst of COVID-19. That new loan required pitting one group of hedge funds against each other in a transaction known as an “uptier exchange”. In such deals, a disfavoured group of once-senior lenders get their debt pushed down in seniority. That structure has increasingly become common among highly indebted companies even if it is also legally controversial. And sorting out the propriety of that maneuver is a barrier to resolving the Revlon bankruptcy. New bankruptcies will also put the overall increased complexity of capital markets under the microscope, according to the commentary. Read more.

*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.

Embattled Scandinavian airline SAS and unions representing pilots will resume negotiations on Wednesday to try and agree a new labour deal to end a one-week strike, Reuters reported. SAS has canceled more than 1,200 flights since July 4 when talks with many of its pilots over a new collective bargaining agreement collapsed and they launched the crippling strike. "What has now happened is that we have asked the parties to gather in Stockholm from Wednesday," Swedish mediator Jan Sjolin said. Henrik Thyregod, head of the Danish pilots union told Reuters he was certain an outcome would be reached but was unsure of how long the negotiations would take. Spokespeople for SAS and the Norwegian and Swedish pilot unions also confirmed that the talks will resume but declined to elaborate on the content or expected outcome. The airline said on Monday it had informed mediators that it wishes to resume negotiations with the aim of "reaching a new collective agreement." The loss-making carrier has estimated the strike, now in its ninth day, is costing $10 million to $13 million a day.

Asbestos-injury plaintiffs have made a plausible case that French multinational Saint-Gobain’s CertainTeed unit defrauded them when it pushed its mass asbestos liabilities into chapter 11, a bankruptcy judge ruled, WSJ Pro Bankruptcy reported. Judge Craig Whitley of the U.S. Bankruptcy Court in Charlotte, N.C., said on Thursday that personal-injury lawyers had made sufficient allegations to support a claim that Compagnie de Saint-Gobain SA and its CertainTeed LLC materials division hindered the rights of asbestos victims. A CertainTeed spokesman said it believes the allegations have no merit and will defend its position vigorously. CertainTeed and several other large, profitable companies have used a Texas corporate law in recent years to move mass asbestos liabilities into bankruptcy, isolated within corporate subsidiaries that have no other business operation. Plaintiffs’ lawyers have challenged the tactic, known as the Texas Two-Step, saying that it lets companies access the protections of chapter 11 without placing business assets in a value-destroying bankruptcy. Judge Whitley on Thursday declined to dismiss a challenge to CertainTeed’s prebankruptcy reorganization, saying the allegations from plaintiffs’ lawyers put forth a plausible claim for relief.

Cryptocurrency exchange Blockchain.com could lose $270 million on its loans to bankrupt crypto hedge fund Three Arrows Capital (3AC), Reuters reported. The development comes days after 3AC filed for chapter 15 bankruptcy, seeking protection from creditors in the United States after one of the most high-profile blow-ups of the crypto crash this year. "Three Arrows is rapidly becoming insolvent and the default impact is approximately $270 million worth of cryptocurrency and U.S. dollar loans from Blockchain.com," Blockchain.com's Chief Executive Officer Peter Smith said in a letter to shareholders, according to a company spokesperson. Earlier this week, digital asset exchange Genesis Trading also said it had been exposed to 3AC, but had mitigated its losses after the hedge fund failed to meet a margin call. Aggressive rate hikes by the U.S. Federal Reserve and recession fears have led to a turmoil in equities and sparked a selloff in cryptocurrencies. The crypto winter has hit several companies in the sector including lending platform Celsius Network and Voyager Digital.

A father-son team behind a hops wholesale company has faced tough years recently: first falling prey to a foreign scam, then grappling with legal action against two corporate giants. Now, Randall and Tase Flores, the pair behind US Hop Source in Englewood, Colo., fear bankruptcy is their only way forward, the Denver Post reported. The trouble started in the fall of 2020 when US Hop Source received a request for a price quote on 1,100 pounds of hops from a so-called Marcos Estrada of Estrada and Sons for a new brewery being built in Panama City, Panama. The Floreses’ company buys and sells hops around the world. “It wasn’t out of the ordinary,” said father Randall Flores pointing to deals they’ve done with a Swedish merchant and a craft brewery in Palau. First, it was business as usual: providing prices, chatting over the phone, starting the invoice process and taking a credit card payment for about $19,000, which initially posted, he said. A follow-up email from Estrada prompted US Hop Source to hold those hops, as he placed an additional order valued at $31,000. Another credit card payment was issued, but this time, online payments company Paysafe flagged it for further investigation. Later, it was determined that both major payments were fraudulent. “We fell prey to a very sophisticated, international business scam,” the elder Flores said. However, for the Floreses, the financial situation is worse. After receiving the first payment of around $19,000, the team at US Hop Source had already begun buying related supplies and shipping, not realizing “the card number that was used was a JPMorgan Chase bank card number that does not nor has never existed,” Randall Flores said. Tase Flores said, after it dawned on them, they tried to contact Estrada and Sons to no avail. They filed police reports and met with the Department of Homeland Security. Paysafe soon came calling for its money back, although “it was more than two weeks before they realized that they had paid out $19,000 on a credit card number that never existed,” Randall Flores said. The Floreses allege that Paysafe terminated US Hop Source’s account in December 2020, and tried to withdraw money from the company’s bank account several times.

Voyager Digital Ltd. marketed its deposit accounts for cryptocurrency purchases as safe, protected by the nation’s banking insurance system in the event of a failure, the Wall Street Journal reported. This week, when the company tumbled into bankruptcy, customers learned they didn’t exactly have the protection they expected and a banking regulator began an inquiry. Voyager, a brokerage and lender, was caught in a spiral of plunging crypto prices that is collapsing hedge funds and companies and which blew a hole in its assets. Bitcoin, for example, has lost more than half of its value so far this year. Voyager froze all activity, including withdrawals on $350 million in customer deposits that are stored at Metropolitan Commercial Bank, a small New York bank. Voyager said customers would be able to access those dollars after “a reconciliation and fraud prevention process is completed.” It wasn’t clear how long that would take. The funds are expected to be paid in full to the customers. That may not be the case for crypto assets held at Voyager. Still, some customers online said they were only just learning their deposits weren’t insured by the Federal Deposit Insurance Corp. in the way they thought. Voyager had marketed the accounts as protected by that national safety net, an attractive pitch in the volatile world of cryptocurrency. Read more. (Subscription required.) 

In related news, crypto trading firm Alameda Research provided emergency credit lines to the now-bankrupt crypto lender Voyager Digital Ltd., in which it owned a minority stake. Bankruptcy filings show Alameda was also a customer, the Wall Street Journal reported. Alameda, founded by the crypto billionaire Sam Bankman-Fried, borrowed $376.8 million worth of cryptocurrencies from Voyager, the filings in the New York bankruptcy court show, paying rates between 1% and 11.5%. Alameda “seems to be wearing every possible hat in Voyager’s bankruptcy,” as a creditor, shareholder and borrower, said Georgetown Law professor Adam Levitin. “There is a general phenomenon of a lot of recycled capital within crypto, and this is an example of that.” In an interview, Mr. Bankman-Fried said that Voyager had lent money to Alameda as part of its normal course of business, and that it was unrelated to the $75 million that Alameda recently lent to Voyager to ease the lender’s short-term liquidity crunch. “The money that was lent to Alameda is money that will ultimately be returned, and presumably used to pay back customers,” he said. The tight links between crypto firms are reverberating across the industry. Voyager’s bankruptcy was precipitated by the insolvency of the crypto hedge fund Three Arrows Capital — Voyager’s largest borrower, owing more than $650 million to the lender. Three Arrows defaulted on the uncollateralized loan on June 27. The Singapore-based hedge fund has been ordered to liquidate in the British Virgin Islands and sought protection from creditors in the U.S. on Friday. Read more. (Subscription required.) 

A bankruptcy judge said he would consider appointing an independent expert to assist in evaluating the mass claims linking Johnson & Johnson’s talc-based baby powder to cancer, WSJ Pro Bankruptcy reported. Judge Michael Kaplan of the U.S. Bankruptcy Court in New Jersey on Wednesday floated the idea of appointing an outside expert to help him wade through legal, financial and scientific questions around allegations that J&J’s talc products contained asbestos and caused ovarian cancer. Personal-injury lawyers and the healthcare company disagree about how much those tort claims are worth. J&J has denied that its baby powder was unsafe but moved its talc-related liabilities into chapter 11 in October to drive a settlement of roughly 40,000 pending talc cases as well as future injury claims. J&J created subsidiary LTL Management LLC to carry those or the company’s talc liabilities into chapter 11, keep its consumer-health business out of bankruptcy and freeze lawsuits in place. Plaintiffs’ lawyers have decried the bankruptcy filing, saying it will deny injury claimants their constitutional right to a jury trial. J&J has said that victims can be compensated more quickly and efficiently in a chapter 11 plan than through costly litigation in the tort system. Judge Kaplan agreed with J&J in February that the chapter 11 was filed in good faith and for a valid reorganizational purpose. A federal appeals court is now reviewing those findings. Meanwhile, mediated talks are continuing, though both sides appear to be at an impasse regarding a settlement proposal mediators have put forth, according to Judge Kaplan, who said he was considering how to move the process forward and encourage a resolution.

Account holders at now-bankrupt Voyager Digital Ltd. shouldn’t expect to get all their crypto back as the company reorganizes, Bloomberg News reported. The crypto brokerage and lender filed for chapter 11 bankruptcy late Tuesday, renewing unresolved legal questions about how digital assets will interact with U.S. insolvency law. One thing is certain: Voyager doesn’t intend to simply give users back their Bitcoin, Ether and other assets stored on the platform. The company’s plan to exit bankruptcy plainly says it expects account holders to be “impaired” by the chapter 11 process, meaning they won’t be getting back exactly what they’re owed. Voyager intends to repay users with a mix of the crypto they deposited, stock in the restructured company, Voyager tokens and money recovered from bankrupt hedge fund Three Arrows Capital, court papers show. Three Arrows owes Voyager more than $650 million. Customers with U.S. dollar deposits in their accounts will be able to reclaim that money “after a reconciliation and fraud prevention process” is completed with Metropolitan Commercial Bank, according to a statement from Voyager. Voyager doesn’t keep user assets in designated wallets for each customer. It instead mixes deposited crypto into asset-specific pots, like ones for Bitcoin and Ether, according to court papers. The company has about $1.3 billion of crypto assets on its platform, it said in the statement.

A federal appeals court ruled that lenders can’t foreclose on homes when people named in the foreclosure proceedings file for personal bankruptcy, even when they don’t directly own the property at issue, WSJ Pro Bankruptcy reported. The U.S. Second Circuit Court of Appeals said Wednesday that lender Bayview Loan Servicing LLC improperly foreclosed on the primary residence of Eileen Fogarty shortly after she filed for bankruptcy protection in 2018. Ms. Fogarty’s bankruptcy filing triggered an automatic stay on collection efforts by her creditors. Bayview violated the stay when it sold her home at a foreclosure auction days later, the three-judge panel ruled Wednesday, while remanding her case to bankruptcy court to determine sanctions against the lender. Ms. Fogarty had lived in the house in Shirley, N.Y., owned by 72 Grandview LLC, a limited liability company in which she held a 99% interest. The company in 2010 stopped making payments on a mortgage loan backed by the property, and the lender moved to foreclose the following year, naming both the company and Ms. Fogarty as defendants in the foreclosure lawsuit. After Ms. Fogarty filed for bankruptcy, Bayview took the position that it could proceed because the property’s owner was the LLC, which wasn’t in bankruptcy. The U.S. Bankruptcy Court in Central Islip, N.Y., sided with the lender and rejected Ms. Fogarty’s request for sanctions as punishment for selling the home despite her personal filing. A federal district judge reversed, ruling in her favor. Bayview then appealed to the Second Circuit. “[W]e conclude that Bayview willfully violated the automatic stay when it completed the sale while knowing that Fogarty, a named party in the foreclosure action, had filed a bankruptcy petition,” the appeals court said, noting an “error of law” at the bankruptcy-court level.

Two creditors of TPC Group Inc. lost a bankruptcy court ruling on Wednesday, with a judge saying that the chemical business didn’t act improperly when loan documents were amended to change the pecking order of creditors, WSJ Pro Bankruptcy reported. Judge Craig Goldblatt of the U.S. Bankruptcy Court in Wilmington, Del., said TPC didn’t violate the rights of Cerberus Capital Management LP and Bayside Capital Inc., who combined own about 10% of TPC’s $930 million senior secured notes issued in 2019. TPC in 2021 and 2022 issued roughly $200 million in 10.875% notes senior to its 2019 notes and the transactions were backed by creditors holding most of the existing debt. The Houston-based company filed for bankruptcy protection in June with a restructuring agreement with most creditors. Cerberus and Bayside, who didn’t consent to the agreement, sued TPC shortly after its bankruptcy filing, arguing the company breached its credit agreements by layering new debt on top of the notes Cerberus and Bayside hold without their consent. The court concluded on Wednesday that the loan documents permitted the majority holders to amend the agreement to allow for the subordination of the old debt to the new notes, Judge Goldblatt wrote. “As a result, the debt now held by the majority holders is senior to that of the minority lenders,” he wrote.