Bond investors are facing challenges as Incora, an aerospace parts supplier, attempts to emerge from bankruptcy, shedding light on the struggles of high-yield debt investors in the current credit cycle. JPMorgan Chase & Co. and affiliates of BlackRock Inc. are among the money managers striving to reverse a rescue financing completed by Incora in 2022, which left them and other investors in a worse position. In recent years, companies in distress have increasingly sought emergency funding from select money managers, disadvantaging their other creditors in the process.
Investors left out in the cold often find themselves at a disadvantage in the event of company failure, impacting the amount they can expect to receive in the event of bankruptcy. Additionally, these financings can lead to litigation, further depleting the company’s resources. The consequences are evident in distressed debt outcomes, with defaulted junk bond holders averaging just 33 cents on the dollar in 2023, a significant decrease from the 40 cents over the past 25 years, according to a JPMorgan report.
Loan holders fared even worse, recovering only 38 cents on the dollar on average last year, compared to 64 cents over the last approximately 25 years. Repeat defaulters are contributing to these low recoveries, with around 40% of bankruptcy filings in 2023 having prior defaults, as reported by Morgan Stanley.
The impact on recoveries was particularly notable when companies engaged in liability management deals before filing for bankruptcy, resulting in lower recoveries for first-lien debtholders compared to those that had not pursued similar deals, as highlighted by Fitch Ratings. Incora’s creditors experienced firsthand the challenges faced by companies seeking to manage liabilities amidst financial turmoil.
According to Bryan High, head of capital solutions at Barings, aggressive financings can lead to costly litigation in the future, an aspect that not all investors may have factored in when valuing a company’s debt. The implications of these developments are significant, with 12-month default rates expected to peak in the first half of this year, according to a report by Morgan Stanley. The struggles of high-yield debt investors underscore the complexities and risks inherent in the current credit landscape.
