Report: Bankruptcy-related M&A at highest levels since 2004

Citing data compiled by Thomson Reuters, The Financial Times has reported that bankruptcy-related M&A deals have hit their highest level globally since August 2004. With the economic downturn forcing more companies into sales of distressed assets, it seems likely the trend will continue.

"We've only just begun," Skadden Arps Slate Meagher & Flom restructuring co-chair Gregory Milmoe told the FT. "Given the dearth of capital and the substantial increase in the number of companies that will be troubled, one would expect the M&A rate to increase dramatically."

A few weeks ago The Am Law Daily commented on the rise in section 363 asset sales and liquidations occurring in bankruptcy, citing pending sales by BearingPoint and The Greenbrier Hotel.

"[Section 363s] are a capital markets-driven phenomenon; there's less debtor-in-possession financing to stay in the ordinary course of operations and support a standalone [bankruptcy] plan," Willkie Farr & Gallagher business reorganisation chair Marc Abrams told us. "And there are equally reduced levels of exit financing that would permit a company, once it comes up with a standalone plan, to emerge from bankruptcy."

The FT points to the $350m (£250m) BearingPoint deal and the decision by bankruptcy auto parts manufacturer Delphi to sell its brakes business to a Chinese company for $100m (£67m) as evidence that bankruptcy-related M&A is on the rise.

Thomson Reuters identified 34 such deals in March alone and 67 so far this year. The bulk of those deals were in the US and Japan, because of the length of time both countries have been in recession and more liberal bankruptcy rules that allow companies to operate while they restructure.

According to Thomson Reuters data, monthly totals for bankruptcy-related M&A peaked at 87 such deals in July 2002 and dwindled to a mere seven in May 2007, shortly before the onset of the global recession.

While many of the deals of the last downturn involved telecoms and tech start-ups being acquired by strategic and private equity buyers, this time around, the PE money has remained on the sidelines because debt has become more expensive.

Since insolvencies tend to peak 12 to 18 months after the beginning of a recession, Thomson Reuters data suggests that more bankruptcy-related M&A work will emerge later this year.