The Fed and Chapter 11

It’s become fashionable to ascribe the decline in big chapter 11 cases to the low interest rates created by the Federal Reserve. If so, yesterday’s actions suggest a revival in the restructuring trade is still further off.

The basic idea is that when interest rates are low, distressed companies can refinance their way out of trouble – companies being somewhat like homeowners in that regard. When refinancing is possible, bankruptcy looks like a very poor second choice.

But when interest rates rise, the refinancing option becomes less attractive, because there is a cost to refinance, again just like for homeowners. When that happens, the company must either pay according to the original terms or face the possibility of filling for bankruptcy.

We were seeing a bit of this sort of an effect following the Fed’s suggestion this summer that it would begin to “taper.” Now the refinancing window has been opened again, for at least some brief period of time.

All of which means that restructuring departments of law firms are not going to be adding associates in the near term, and the partners in those departments are going to be scrambling to get the cases that are available. Given that finance has not fully rebounded, this means some number of law firms are going to be a bit squeezed.

And those of us who (darkly) enjoy following large chapter 11 cases have to wait a bit longer.