Davis Polk Restructuring co-head Damian Schaible and Restructuring partner and head of Liability Management & Special Opportunities Brian Resnick shared their thoughts on the 2024 bankruptcy outlook with Petition.

Looking ahead to what the biggest themes of 2024 could be, Damian said, “Private Credit facilitating maturity extensions. As the 2025/2026 maturity wall gets closer, I expect to see even more sponsors look to private credit to facilitate maturity extensions. Expensive junior capital, often with equity attached, will be used to delever 1L debt to make it refinanceable.”

Brian said, “Tighter Docs Lead to More Aggressive Liability Management Structures. Once document flexibility and loopholes get closed off — sometimes in connection with a liability management transaction or amend and extends — companies will be forced to get increasingly aggressive in finding leverage for negotiations. Never underestimate the creativity of smart lawyers to find novel structures and the market is learning that lending documents are rarely as tight as they look.”

Of the $1.9 trillion in maturing commercial real estate debt over the next several years, Damian said, “Much of it will just continue to roll — either with maturity extensions or just sitting in default. Banks and lenders won’t want to own commercial buildings in a higher interest rate environment amidst great uncertainty for many city centers around the nation.”

Brian added, “Lenders for the most part do not want to take back properties. While there will be some foreclosure and restructurings, we expect to see many “blend and extend” transactions. These are short term loan extensions granted in exchange for a modest rate increase and an infusion of new equity (often in the form of preferred equity).”

Outside of the U.S., both Damian and Brian mentioned they expected to see distress in Europe. Damian noted that it is “closer to the macro issues in all respects — energy, wars, and shifting populations.”

Regarding the firm’s talent priorities going into the new year, Damian said, “We are in continued, but responsible, growth mode, as we have been for several years. The opportunities for individual growth and development by junior lawyers in this market environment are truly exciting. There are a lot of complicated deals to get done, and junior lawyers are going to get to learn and lead a lot.”

Discussing the Purdue case before the Supreme Court, both Damian and Brian hope that the court affirms the Second Circuit. Damian said, “It’s so important that I hope the Court gets it right — widely supported and massively important third-party releases are critical in many cases.”

Both also agree that the economy is heading toward a soft landing in 2024. Damian noted, “Too much money has been raised and investors remain desperate to put it to work.”

Thinking about which U.S. industry will see the most amount of distress in 2024, they agreed on the healthcare industry. Brian said, “Even though people have been calling this for years, the thesis that the underlying model is broken seems right.”

“Sponsors have loved it for awhile and have levered up many traditionally thin-margin companies in the sector,” Damian added. “Now wage inflation, rising rates and increasing and expensive regulatory developments are causing real issues.”

When asked what the biggest restructuring controversy will be, Brian responded, “Opportunistic liability management transactions for relatively healthy companies, primarily to capture discount.”

Damian said, “Governance of distressed companies – decisions made in the lead-up to restructurings that benefit sponsors and management to the detriment of funded debt creditors (and the decision-makers).”

Noting what questions publications should be asking looking at the new year, Damian answered, “Will 2024 bring a wave of Restructurings or just tons of Liability Management?”

Brian said, “How will direct lenders handle an uptick in defaults – will they be prepared to be aggressive with sponsors or will they focus on those relationships and be willing to sacrifice some returns in their defaulted credits?

“BK Pros Weigh In. Part III.,” “BK Pros Weigh In. Part IV.,” “BK Pros Weigh In. Part V.,” Petition (December 2023)

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