In November, Fossil restructured in London. It is a US-listed company, and it used an English Part 26A plan to change one class of securities while leaving the rest of the capital structure alone. In July, New Fortress Energy, carrying roughly USD 9.5bn of liabilities, had its plan recognised in New York under Chapter 15.
Processes are getting narrower and faster. What they are not doing is reducing debt.
Mike Harmon spent twenty-one years at Oaktree Capital in the Special Situations Group, investing in distressed companies for control or significant influence, and now teaches financial restructuring at Stanford Graduate School of Business. He wrote The Financial Restructuring Tool Set because the practical guide he wanted did not exist. We spent an hour on why balance sheets stop getting fixed, and what would have to change for that to reverse.
What is in it
Equity as an out-of-the-money call option. Once a company is worth less than its debt, the option gains value from time and from volatility rather than from enterprise value — so shareholders extend maturities instead of repairing the balance sheet.
Covenant-lite removed the timetable. With no maintenance test there is no early event of default, so a lender watching a borrower deteriorate has no right to enforce anything until there is an actual default.
By then, priority is all that is left to negotiate. And priority is zero-sum: one group moves up only because another moves down. The negotiation stops being about the company.
Cutting debt means somebody has to take the equity. Most holders cannot. A CLO has an equity bucket with a hard limit; a mutual fund has a mandate written for debt. Only genuine distressed funds want the position.
Which is why the swaps that still get done are in private credit. One or two lenders instead of forty, able to coordinate, and able to own the business afterwards.
The missing rung. The US has liability management at one end and Chapter 11 at the other with nothing in between, while the UK, Japan, France and China all run a lighter court-supervised path. Mike makes the case for one.
Chapters
00:00 Zombie Companies in Credit Markets
02:23 Financial Distress vs Restructuring Outcomes
04:35 Equity as an Out-of-the-Money Call Option
07:24 Covenant-Lite Loans and the Gheewalla Precedent
08:46 Leverage at 10x EBITDA: Anatomy of a Zombie Company
10:57 Chapter 11 Valuation and DIP Financing Control
15:44 Value-Creating Interventions in Distressed Companies
19:13 Maintenance and Growth CapEx Under Debt Overhang
21:31 Scenario Analysis vs Cash Flow Forecasting
23:19 Economic Distress vs Financial Distress
24:54 Covenant-Lite Documents and Lender Size Advantage
26:20 Deal Documents in Distressed Investing
28:54 The Majority Lender Playbook in Liability Management
32:05 Early Creditor Organisation vs Waiting for Default
34:26 Liability Management Exercise Success Rates
35:59 Debt Maturities and Forced Deleveraging
36:48 The Holdout Problem in Out-of-Court Debt-for-Equity Swaps
41:31 Private Credit and Creditor Coordination
44:14 Absolute Priority Rule and Cram-Down Settlements
46:58 StaRUG, WHOA and UK Part 26A Restructuring Plans
48:46 Fossil and New Fortress Energy: Restructuring in London
50:30 The Case for a US Chapter 16 Process
53:58 In-Court Restructuring Tools and Bankruptcy Costs
57:57 Where Distressed Investors Add Value
1:02:05 Assessing Whether a Distressed Business Is Fixable
About the guest
Mike Harmon is a Lecturer in Finance at Stanford Graduate School of Business, where he has taught financial restructuring for six years. Before that he spent twenty-one years at Oaktree Capital Management in the group now called the Special Situations Group, investing in distressed and dislocated companies for equity control or significant influence. He is the author of The Financial Restructuring Tool Set: How to Fix Your Broken Balance Sheet (Columbia University Press).
Mike on LinkedIn · Stanford Graduate School of Business · the book on Columbia University Press and Amazon
Support material
Fixed + Floating
Fixed + Floating is a credit podcast hosted by Portfolio Manager Josef Pschorn. Long-form conversations with credit market practitioners - portfolio managers, analysts, restructuring advisers and academics - on private credit, high yield, distressed debt, CLOs, liability management and credit policy.
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References
The Financial Restructuring Tool Set: How to Fix Your Broken Balance Sheet, Mike Harmon, Columbia University Press — Columbia University Press · Amazon
Liability Management’s Limited Runway: Corporate Restructuring Today, Mark J. Roe, Vasile Rotaru - Oxford Business Law Blog
