So the word is that convertible debt issuance is at an all-time high. On one level, that is totally predictable.
In an environment where bond prices are going down and stock prices are going up, the option to bail out of the debt and jump into equity has a lot of intuitive appeal. Just don’t think too long about the somewhat shaky nature of many of the companies that issue convertible debt.
But in many respects, the boom in convertible debt also means that the post-Lehman bond market bonanza is over. Or at least entering its last stage.
As such, we can expect that the number of big Chapter 11 bankruptcy cases will rise to a more typical level. Which itself raises some interesting questions.
For example, while all the big law partners are in place, ready to restructure the next debtor that walks in the door, will they have any associates to help them? Law firm hiring is way down, and all indications are that restructuring departments are shrinking.
I started in practice in 1997, and within a few years (think Enron, etc.) I was quite aware of the lack of mid-level restructuring associates.
And then there is the question of what the financial crisis and Dodd-Frank might do to the debtor-in-possession loan market. Some of the key player in this market are shrinking as a result of the crisis, and Dodd-Frank may encourage more of that. All of this will take a while to shake out.
But when the restructuring cases do return, it may be that the makeup of the D.I.P. lending market may be quite changed. How that will effect Chapter 11 is another great unknown.
All of this is probably a year or two out, since distressed companies will be able to coast for a while on their existing funding. But eventually all that debt will come due. And then we’ll find out what happens.
Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Hall Law School and an expert on bankruptcy.
