Derrough on Restructuring’s 3D Chess: State of Distressed Debt
Feb 8, 2025
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Bill Derrough, Managing Director at Moelis & Company, draws from his 35 years on Wall Street to share insights on today’s vibrant rescue-financing landscape. He recounts pivotal moments from the Hertz bankruptcy auction and American Airlines’ Chapter 11 exit. The discussion delves into emerging trends in liability management, the role of cooperation agreements, and creative restructuring strategies. Derrough also addresses sector-specific challenges in distressed debt and highlights significant case studies, underscoring the collaborative nature of modern finance.
The distressed debt market currently shows a historically low distressed ratio of 3.7%, indicating significant stability since April 2022.
Geopolitical risks and increasing leverage present potential vulnerabilities in the market, likening it to a 'tinderbox' ready to ignite.
Emerging private credit markets allow companies to utilize multi-faceted funding solutions simultaneously, resulting in competitive negotiations during restructuring.
Deep dives
Overview of the Distressed Debt Market
The current state of the distressed debt market is characterized by a historically low distressed ratio of 3.7%, marking the lowest since April 2022. This reflects an extended period of market stability, with an impressive 54 months of distressed ratios below 11%, indicating a stronger environment than seen prior to the Great Recession. Notably, the communications sector exhibits the highest distress ratio at 12.1%, influenced by challenges faced by broadcasters and content creators, while the healthcare sector follows at 7.9%. Overall, the technical aspects of the market appear to be favorable, although potential weaknesses could emerge in March.
Potential Geopolitical Risks
There's a prevailing sentiment that the distressed debt market may be on the brink of facing unexpected geopolitical risks. With volatility in current geopolitical conditions, analysts suggest that future market disruptions could stem from unforeseen events rather than anticipated triggers. This concern is compounded by the increasing leverage within the market, creating a situation that resembles a 'tinderbox' ready to ignite. Thus, market participants must remain vigilant about emerging situations that could lead to significant market upheaval.
Bill Durow's Background and Industry Experience
Bill Durow has shared insights about his journey in the finance and restructuring industry, emphasizing his diverse background that led him to distressed debt advisory. He began his career with minimal knowledge of corporate finance but quickly progressed by leveraging significant experiences with reputable establishments, including Solomon Brothers and Jeffries. His work spans various aspects of restructuring, including navigating complex debt situations while focusing on the interplay of soft and hard restructuring approaches. His experiences have formed the foundation for his current role in advising on capital structure and developing innovative solutions for distressed companies.
Trends in Private Credit Markets and Restructurings
The podcast discusses the evolving landscape of private credit markets, highlighting the increased use of dual-tracking and multi-faceted processes to navigate corporate distress. Companies can now explore various sources of funding simultaneously to address their capital needs, including traditional creditors and private credit options. This multifaceted approach results in competitive pricing and financing terms, reflecting a more dynamic negotiation process in restructuring scenarios. However, it also introduces additional complexities that management teams must skillfully navigate to ensure beneficial outcomes.
Challenges in Post-Reorganization Performance
The discussion touches on the increased difficulties companies face when exiting bankruptcy, with many firms struggling under excessive debt loads. Post-reorganization performance has been mixed, with some firms failing to adapt to the new financial landscape, leading to ongoing risks of further distress. The lack of maintenance covenants has contributed to this situation, potentially leaving companies without prior warning systems for financial failure. As market conditions shift and pressures mount, corporate entities must reassess their strategies to avoid repeating historical missteps.
Outlook for Distressed Debt in 2025
Looking ahead to 2025, the distressed debt market faces a mixture of optimism and caution. Despite extended periods of low distressed ratios, analysts are wary of potential shocks that could disrupt the stability witnessed over the past few years. Factors such as inflation, geopolitical tensions, and adjusting regulatory landscapes could present challenges for companies operating with high leverage. The current environment appears to favor continued restructuring efforts, yet stakeholders must remain adaptive to changing market conditions and the unpredictable nature of the upcoming year.
In his 35 years on Wall Street, Moelis’ Global Co-Head of Capital Structure Advisory Bill Derrough hasn’t seen a rescue-financing environment as robust as today, “where we [can] run so many parallel processes at the same time.” As one of the key bankers behind Hertz’s successful bankruptcy auction and American Airlines’ game-changing Chapter 11 exit merger, Bill shares with Bloomberg Intelligence’s Noel Hebert and Phil Brendel some “war stories” and his insights on trends in liability-management exercises, the rise of cooperation agreements and developing creative restructuring solutions (6:00). Prior to that, Noel and Phil discuss the high yield market’s historically-tight spreads and 4.5-year respite from a surge in distressed inventory. The podcast concludes with BI’s Negisa Balluku joining Noel and Phil for a round-table discussion covering Serta Simmons’ impact on equitable mootness, Hertz, Yellow Corp., Spirit Airlines, GOL Airlines and Franchise Group (1:30:00).
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