By Reorg
Consistent with the improvement in equity and credit markets in 2021 as compared with 2020, claimholders of companies that filed for chapter 11 in 2021 received sharply higher recoveries across all classes of creditors as compared with cases that were initiated in 2020. Recoveries across chapter 11 cases improved, on average, for all claimholders by 7% to 20% depending on the class of claims. First lien creditors to debtors that filed in 2021 had a median recovery of par in 2021, and compared with 2020, a smaller percentage of the 2021 first lien claimholders received equity as part of their recoveries.
Junior stakeholders also received improved recoveries in 2021, on average, including prepetition equityholders. However, the improvement in second lien recoveries was only enough to match median recoveries for unsecured debtholders.
Reorg analyzed 183 cases across 2020 and 2021 and presents the information in its new restructuring dataset, which is included in Reorg’s Credit Cloud. The information collected includes types of securities received as part of a plan of reorganization and the stated recoveries included in disclosure statements.
A summary of recoveries by class is shown in the table below:
First Lien Claims
Consistent with the year-over-year improvement in recoveries, the percentage of first lien claims receiving par recoveries increased for 2021 cases as compared with 2020 cases. First lien claimants received par recoveries in 41% of 2021 cases where such claims were present, up from par recoveries in 28% of 2020 cases. Additionally, the mix of securities received as part of debtors’ plans of reorganization improved to include more certain recoveries in 2021, with more than 50% of first lien claims receiving all cash and/or debt and just 33% of plans including equity as at least part of first liens’ recovery. In 2020, 41% of plans resulted in first lien claims receiving equity as part of their recovery, with only 34% of plans paying first lien claims in only cash or debt.
Second Lien vs. Unsecured Claims
Second lien status offered few protections above unsecured claimholders. For 2021 cases, Reorg calculates median recoveries for second lien claimholders were 40%, slightly above the 37% calculated for unsecured debtholders. This was an improvement, however, from 2020 cases in which second lien holders on average performed worse than unsecured debtholders across cases, as shown in the table above.
Common Equity Recoveries
Cases in which prepetition common equity received a recovery were weighted toward energy sector cases in 2020 as compared with more broad based recoveries for 2021 debtors. More than 50% of the cases in 2020 in which common equity received a recovery were in the energy sector. Interestingly, in these energy cases, prepetition common equity received recoveries despite senior creditors being impaired.
In a number of these cases, the recovery that common equity received included warrants struck at a value in which senior stakeholders would receive par recoveries. Any initial equity received by prepetition shareholders was limited. Another similarity among cases is that a number of them were relatively quick, three to six months. In other words, it is possible that to avoid a timely and expensive valuation fight, debtors and creditor support parties agreed to give prepetition common equityholders a form of recovery which would only kick in if markets improved and would not take away recovery of other stakeholders’ original principal amount.
In 2021, sectors were more broad based, and in almost half of the cases in which equity received recoveries, the class was reinstated. As shown above, fewer plans in 2021 resulted in common equity receiving warrants. In more than 50% of cases in which common equity received a distribution, equityholders were either reinstated or received new equity.