The Examiners: Mark Roe on the Outlook for Corporate Restructuring

Interest rates that remain near zero and debt maturities that have been pushed out to 2017 and 2018 have helped drive Chapter 11 filings to historic lows. Has this difficult environment put corporate restructuring on life support?

With interest rates near to zero for several years, weak firms can refinance their way out of problems that otherwise would have forced a financial restructuring and a Chapter 11 filing.

It’s all part of the extended bailout of the economy that the Fed has engineered since 2008. Low interest rates do not just bolster the weak banks that imploded in 2008 and 2009. Operating companies get the same boost that banks are getting via low funding costs—with operating firms’ boost often coming via cheaper loans from those banks. Cheaper financing gives weakened firms a financial respite during which they can restructure operationally.

But cheaper funding also allows some firms to kick the can down the road, postponing operational restructuring. With ongoing interest rate levels artificially lower than firms’ long-term real cost of capital, firms aren’t forced to make hard choices.

When interest rates return to a more normal level, we’ll see more corporate restructurings of the firms whose operations survived only because their cost of funding was kept artificially low by the Fed’s quantitative easing. We’ll see winners—whose operations became strong enough to support higher interest rates. And we’ll see losers when rates rise—firms whose operations have not been made strong enough to cover a more normal cost of capital. They will be the Chapter 11s that were postponed due to the Fed’s low interest policy. We may even see some localized, smaller bubble-like pops: The low interest rates have been going on for a long enough time that some firms may have expanded operations in a way that’s sustainable only if interest rates stay low.  When they are not low, those firms will be strong candidates for reorganization in Chapter 11.

Mark Roe is a professor of law at Harvard Law School in Cambridge, Mass.