Bond sales keep bankruptcies at bay

James Sprayregen, a restructuring partner in the Chicago and New York offices of Kirkland & Ellis LLP, poses after speaking at the Reuters Restructuring Summit in New York, October 6, 2010.

NEW YORK (Reuters) - Debt-laden U.S. companies will likely stay out of bankruptcy court for the foreseeable future by selling bonds to raise cash, promising quieter days ahead after the roller-coaster ride that began with Lehman Brothers' collapse, bankruptcy experts say.

A year or two ago, looming debt maturities were the main reason for many large bankruptcies, such as real estate developer General Growth Properties (GGP.N). High unemployment, weak consumer confidence and a rough housing market also made it tough for weak companies to survive.

Lehman's bankruptcy in the fall of 2008 touched off a record number of failures, but bankruptcies have dropped sharply in 2010 as investors looking for high returns have snapped up billions of dollars of junk bonds. And experts say they expect that to continue to be a factor in the next year.

That creates an option for companies that otherwise would have sought bankruptcy protection to help wipe out their oversized debt loads and give them a clean slate.

In addition, where possible, banks have extended the terms on debt for companies -- so-called extend-and-pretend -- saving in particular commercial real estate players from falling into default as their asset values have plunged.

"You don't need a bankruptcy lawyer when you have open capital markets and you don't need one when maturities are being extended," James Sprayregen, a restructuring partner at law firm Kirkland & Ellis, said during the Reuters Restructuring Summit this week.

Indeed, bankruptcies have fallen sharply this year from last. Through October 1, 78 public companies with total assets of $63.5 billion filed for bankruptcy protection, down from 167 companies and $444.2 billion in assets during the same year-earlier period, according to Bankruptcydata.com.

But like consumers dealing with a hangover of debt created by easily available home equity loans, the bills will come due, experts said, possibly in 2013 or 2014.

"There definitely are a number of companies that are pushing off the inevitable," said Rob McMahon, managing director for restructuring finance at GE Capital (GE.N).

FROTHY JUNK

Indeed, there are signs of frothiness in the high-yield market as distressed investors and hedge funds compete to invest their funds, McMahon said.

"I do believe because interest rates are so low, it is creating a lot of pent-up demand for institutional money to get deployed," he said.

Among others, highly leveraged companies such as Freescale Semiconductors FSLSM.UL , Burger King BKC.N and Michaels Stores MCHST.UL were able to tap the junk bond market for funds in recent weeks.

Freescale, with ratings in the triple-C category, one of the lowest ranges above default, sold $750 million of notes, while Michaels Stores, also triple-C rated, sold $800 million. Burger King, with split ratings in the triple-C and single-B categories, sold $800 million of debt, according to IFR, a Thomson Reuters service.

An increase in out-of-court debt restructurings in which investors are increasingly taking equity in exchange for their debt has also lessened what was once a looming crisis of hundreds of billions of dollars of maturing debt, McMahon said.

When there is a bankruptcy, it is likely to be a prepackaged restructuring where a debt-for-equity swap or other arrangement has already been reached by the company and its creditors, McMahon said.

For instance, film studio Metro-Goldwyn-Mayer said on Thursday it is working on a prearranged bankruptcy plan that includes swapping equity in the company in exchange for wiping out its more than $4 billion in debt.

Still, time may run out first for the commercial real estate sector, where extensions have so far softened the blow of declining asset values, experts said.

"I call it a slow-motion train wreck," Sprayregen said.

(Reporting by Caroline Humer, Dena Aubin, Ilaina Jonas, Chelsea Emery, Tom Hals and Emily Chasan; Editing by Martha Graybow and Matthew Lewis)