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High Yield Debt

Jay M. Sakalo

It is no surprise to anyone involved in the restructuring community that bankruptcy filings continue to decline. As reported by the American Bankruptcy Institute, corporate chapter 11 filings have decreased 34 percent since 2013.

The theories for the decreased filings abound, including concerns over the cost, the unpredictability and the improving economy. While each of these views has merit, one additional market phenomena that cannot be overlooked is the continued strength in the high-yield [née, junk bond] market and its interplay with the other factors mentioned above.

Despite recent withdrawals from the high-yield market by retail investors, large institutional investors continue to view the high-yield market as a buying opportunity. Even with recent market interruptions caused by international events in Israel, Ukraine and Iraq, the prices on high-yield bonds have risen lately, likely indicating a further move into the junk bond market by large hedge funds and institutional funds.

The ongoing supply of funds into the junk bond market creates easy access to relatively cheap sources of capital for distressed borrowers. The tapping of this market has allowed many borrowers to obtain yet another chance at “turning it around” without having to formally restructure their operations in a court-supervised proceeding. So long as the high-yield market continues its frothiness, we should expect to see the access to such capital have a tangible impact on the decreased number of bankruptcy filings nationwide.