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Will the interest rate increase affect future Chapter 11 filings?

On Behalf of | Dec 21, 2015 | Chapter 11

Wednesday was a seminal moment in the finance industry. The Federal Reserve announced that it would raise its benchmark interest rates by .25 percent. The rate has hovered around zero for the past seven years since the great financial crash of 2008. It is also expected that further interest rates increases will be coming, which will likely push the rate to 1.37 percent by the end of next year.

While we have noted that the potential for interest rate hikes have created a feverous market for mergers and acquisitions, it is worth exploring the effect they may have on future restructuring plans in Chapter 11 bankruptcies.

Most experts believe that the latest rate increase will have little effect, if any, on the restructuring plans that are essential for the success of Chapter 11 bankruptcies. After all, Chapter 11 filings have fallen to historic lows in the last few years, even though a number of industries, such as coal and oil, have endured hard times because of falling commodity prices.

However, as further increases are implemented, it could make credit more expensive for companies to obtain, which would mean that fewer troubled companies would be affordable to purchase outright instead of through a Chapter 11 bankruptcy.

Where that tipping point lies is anyone’s guess; but yesterday’s rate increase is a signal that greater activity with restructuring deals is on the horizon. For further advice and forecasts on Chapter 11 bankruptcy trends, the attorneys at Shulman Bastian Friedman & Bui LLP can keep you apprised.