Ohio’s Economic Growth Outpaces Need for Restructuring, But Dark Clouds Remain
In 2023, despite aggressive predictions of a near-term recession, the economy remained relatively steady. This resulted in an uneven year for restructuring. Substantial money has been raised in the private credit markets and investors remain open to investing in the right situation, which will create opportunity, or illusion, for distressed companies to find restructuring partners for refinancing transactions.
Activity to Continue Outside of Courts
Last year, most restructuring transactions occurred outside of courts. In 2024, this trend should continue. The “post-Covid” picture also became clearer in 2023; it appears that high default interest rates will apply further pressure on struggling companies, especially in certain market segments such as commercial real estate and manufacturing. But, in the right scenarios, the parties may be aligned to negotiate and avoid a lose-lose outcome. There will be potential opportunity for proactive debtors to find (expensive) resolutions with alternate lenders.
In Ohio, in-court commercial restructuring activity remains low. In 2024, larger distressed Ohio-based companies with operations across the country are expected to file chapter 11 bankruptcy cases outside of Ohio, continuing a recent trend. For example, Elyria, Ohio based Invacare, Inc. filed for chapter 11 protection in the US Bankruptcy Court for the Southern District of Texas in February 2023. It emerged from chapter 11 in May with a USD240 million reduction of funded debt. Similarly, on June 1, 2023, Hudson, Ohio based Diebold Nixdorf, Inc., a manufacturer of self-service transaction systems, including ATMs, also filed for chapter 11 protection in Texas. Diebold’s restructuring deleveraged its balance sheet by approximately USD1.3 billion and provided for approximately USD1.25 billion in exit term loan financing. Substantially all of the reorganized debtors’ equity was distributed to Diebold’s prepetition creditors.
The Northern District of Ohio (Akron, Canton, Cleveland, Toledo and Youngstown) had 11,749 bankruptcy filings in 2023, up 15 percent from 2022. The Southern District of Ohio (Cincinnati, Columbus and Dayton, Ohio) had 8,051 filings, almost a 17 percent increase over 2022. Most of these filings were chapter 7 filings, as there were only 38 commercial chapter 11 filings in the Northern District of Ohio and 27 commercial chapter 11 filings in the Southern District of Ohio. Comparatively, on a national basis, commercial chapter 11 filings increased 72 percent to 6,569 in 2023 from 2022’s total of 3,819.
Where the Dark Clouds Loom
In 2024, healthcare, healthcare services, and healthcare real estate will continue to wrestle with systemic issues compounded by the sector’s leverage, leaving little room for error. Sponsors have actively pursued opportunities in this sector, employing significant leverage to finance acquisitions and operations. Lower patient census and reimbursement rates are a central concern. Payor flight further exacerbates this issue. With insurance companies narrowing their networks, providers face a shrinking pool of privately insured patients, leading to decreased revenue streams and even more reliance on Centers for Medicare and Medicaid Services state safety nets. Legacy cost structures also pose a significant challenge in these industries. While beneficial for patient rights, the “No Surprises Act” has imposed further administrative and financial burdens on providers.
Commercial real estate continues to struggle post-COVID. COVID brought a fundamental shift in the use of commercial and office spaces, further exasperated by the growing reliance of the consumer on e-commerce. High interest rates and vacancy rates, mixed with more restrictive lending will make it more difficult for this sector to refinance in 2024.
Economic Growth in the State of Ohio Outpaces the Need for Restructuring
For economic development in the State of Ohio, 2023 was marked by unprecedented growth. Through strategic partnerships and an emphasis on community-focused programs, the State of Ohio has focused on developing new opportunities for businesses throughout the State of Ohio. Companies looking to expand in Ohio received a total of USD4.5 billion in tax credits to stimulate job growth, while another USD2.3 million was awarded to 18 companies commercializing new technologies. In 2024, the Ohio Department of Development will invest more than USD750 million through the new All Ohio Future Fund to increase the number of project-ready development sites in more communities, and USD125 million to fund innovation hubs and a sustainable pipeline of new talent and new technology in Ohio.
The National Increase in Bankruptcy Filings Exposes That Not Everything Is Stable
Nationwide, bankruptcy new filings were up in 2023 compared with a year earlier, across Chapters 7, 11, 13 and 15, according to Epiq Bankruptcy, which compiles U.S. bankruptcy data. See Commercial Chapter 11 Filings Increase 72 Percent in Calendar Year 2023 (epiqglobal.com). These increases in both consumer and corporate filings are attributed in part to the increased higher interest rates. Commercial bankruptcy filings in calendar year 2023 increased 19% to 25,627 from the 21,479 registered the previous year. By contrast, there were 32,506 commercial bankruptcy filings during the height of the pandemic in 2020. Commercial chapter 11 filings increased 72% in 2023 to 6,569 from the previous year’s total of 3,819—but still short of the 7,128 commercial chapter 11 filings during pandemic-fueled 2020. Subchapter V elections for small business debtors within chapter 11 also substantially increased in calendar year 2023, as the 1,939 filings represented a 45% increase from the 1,334 recorded in 2022.
Financial Institution Bankruptcies Highlighted the National Stage
2023 spotlighted financial institution bankruptcies. Before Silicon Valley Bank collapsed in March 2023, it had been 28 months since a US bank failed – the longest stretch without a failure in more than 15 years. Then San Franciso-based First Republic Bank failed. Ultimately, government intervention tempered any major disruption in the banking industry. Nevertheless, stress on local and regional banks continues to cast a significant shadow in 2024. In 2023, New York Community Bank (NYCB) took over the assets of failing Signature Bank. In 2024, NYCB had to raise USD1 billion in capital to offset potential loan losses attributable to the Signature Bank portfolio it recently acquired. Similarly, 2023 brought more clarity and positive recovery to the financial crisis caused by the collapse of several key crypto bankruptcies. Recently, FTX’s new CEO stated in court filings that it expects to fully repay the crypto exchange’s customers. In January 2024, Celsius officially emerged from bankruptcy, announcing a USD3 billion distribution to creditors. Most of this recovery can be attributed to increase in the Crypto markets.
Looking forward, among the variables affecting both corporate and personal bankruptcies going forward in Ohio and nationwide:
- While the 12-month pace is off the inflation peak in mid-2022, inflation remains well above the Federal Reserve’s 2% goal and continues to increase. This continued increase forecloses the Federal Reserve from lowering interest rates in the short term.
- Elevated interest rates will continue to expose the most distressed credits this year, especially as the trend of prolonged elevated interest rates likely will continue to be felt for the foreseeable future.
- As interest rates remain high, debtors may be forced to use the court-processes (receiverships, restructuring, sales) to achieve their restructuring goals if lenders remain stubborn on the terms of refinancing.
- Volatile food and energy prices will directly affect consumer spending.
