While most debtor-companies in Chapter 11 bankruptcy depend on financing from banks to fund their bankruptcy exits, there is an increase in the number of companies turning to high-yield bonds (junk bonds) to fund their bankruptcy exit.
Junk bond sales have surged to records every month since December as companies contend with "wall of maturity" over the next few years, prompting a rush to refinance debt ahead of the quickly approaching repayment deadlines. In February, U.S. high-yield bond sales posted their busiest month on record, with $15.8 billion of new issuance, strategists said.
Both Reader's Digest Association Inc and Lyondell Chemical Co [ACCEIN.UL] used high-yield bonds to partially fund their bankruptcy exit, pay down old debt and fund their ongoing business operations at a time when banks where dramatically cutting back on bankruptcy exit financing due to the recession and credit crunch. And despite current signs that banks are once again warming to the idea of financing companies in Chapter 11 bankruptcy, many companies are still using high-yield bonds as a way to get a quick influx of much needed cash. The most appealing benefits of high-yield bond financing during Chapter 11 bankruptcy is that there are fewer restrictions on the loan terms and more time for the debtor-company to repay the loan. And for many investors, investing in high-yield bonds issued by a company in bankruptcy is an attractive option because the bankruptcy process will place the debtor-company in a better financial position after the bankruptcy exit, creating a win-win situation for both the debtor and the investor.