Executive summary
Elevated interest rates helped push Chapter 11 bankruptcy filings to their highest level in eight years in 2024 and we expect the high volume of restructurings to continue through the first half of 2025.
Over the last two years, higher borrowing costs eroded capital and liquidity from many companies. The Federal Reserve’s pivot in the back half of 2024 likely came too late for some of those companies. We’re also seeing signs of softening consumer spending, especially in sectors such as retail and restaurants. Distressed companies in those industries could be pushed over into bankruptcy as a result.
However, the overall situation could improve in the second half of 2025. If interest rates continue to decline, they could lead to a more favorable M&A environment for CFOs and corporate developers that unlocks deals as a solution to some stressed companies. The deals market also could get a boost from the new Trump administration, which is generally expected to be more deregulatory than its predecessor. Less restrictive regulators could further unlock M&A as an option for companies looking for a white knight.
2024 in review
Bankruptcy filings continued on a near-record pace in 2024. An accelerating pace in the fourth quarter suggests this trend will continue going into 2025.
Four sectors dominated 2024 filings: Consumer goods and services, real estate, healthcare and energy and industrials.
Broadly, two trends drove the restructuring. First was the continued (relatively) high interest rates for most of the year. Second, Chapter 11 filings in 2022 and 2021 were suppressed by unusual levels of government subsidies for consumers and businesses, an ultra-low interest rate environment and an abundance of capital, which fueled M&A activity and enabled companies to borrow their way out of trouble.
Weaker businesses were able to avoid restructuring thanks to these dynamics, but these dynamics have largely dissipated. As a result, bankruptcy filings have steadily increased. According to a Bloomberg report, over the past two years, more than 60 companies have for bankruptcy for a second or even a third time. Many of these are in the retail sector.
Consumer goods and services
Weakening consumer spending and high debt levels took a heavy toll on some consumer goods and retail companies, particularly casual restaurants. There were more than 30 restaurant bankruptcies (including TGI Friday’s, Red Lobster and other large franchise groups) highlighting how consumers have reacted to higher prices and shrinking discretionary income. According to the National Restaurant Association, food costs for the average restaurant have risen 29% since 2020, which has pushed customers to cut back on other goods and services, cook at home or turn to lower cost alternatives. Increasing competition, elevated leverage and unfavorable leases (location and terms) also contributed to the higher level of restructuring activity.
In 2024, store closures outnumbered openings, something not seen since 2021. Retailers with the largest number of closures include several drugstore chains and other specialty retailers such as Family Dollar and Conn’s.
Some companies struggled to recover, even after using Chapter 11 to fix their balance sheets and exit unprofitable locations. Examples include Party City, which emerged from bankruptcy in October 2023 having eliminated $1 billion of debt, and Joann's, which emerged from Chapter 11 bankruptcy in early 2024. Both have subsequently reentered Chapter 11 with plans to liquidate. These cases highlight the impact of inflation on the consumer coupled with the continued migration to online purchases. Other examples in 2024 include the “Chapter 33” filings of rue21 and Eastern Mountain Sports, both filing Chapter 11 for a third time.
Healthcare
Healthcare bankruptcies were elevated again in 2024. Over the past two years, the number of Chapter 11 filings was 75% higher than in the period from 2016-2022 healthcare providers continue to struggle with inflation and downward pressure on reimbursement rates from commercial and government payers.
At one end of the spectrum sit large health systems with scale and optimized geographic positioning that maximize payer mix and negotiated reimbursement rates. Not-for-profit safety net hospitals — which receive substantial government subsidies and tax advantages exist on the other end of the spectrum.
The sector challenges are most pronounced in the middle part of this range. These providers tend to be sub-scale and therefore lack leverage in rate negotiations. They’re more dispersed geographically and operate in more competitive markets, and they tend to be in lower income neighborhoods with less favorable payer mix, which tends to correlate with other lower margin operating metrics. These for-profit systems also lack the same level of government support to compensate for the lower margin positioning.
According to bankruptcy filings, two of the larger health systems that filed for Chapter 11 in recent months were Steward Health Care and Prospect Medical (Prospect filed in January of 2025). These two systems had some, if not all, of these characteristics and operated more than 45 hospitals across the country when they filed for Chapter 11.
Commercial real estate
The post-COVID-19 fallout in commercial real estate continued in 2024 due to ongoing high vacancy rates in office properties combined with the impact of higher interest rates on already depressed valuations.
In 2024 there were 187 Chapter 11 filings in the real estate sector accounting for 35% of total filings. Over the four years since 2020, real estate’s share of Chapter 11 activity averaged 32% compared to 18% during the four years preceding 2020 — reflecting a prolonged period of distress in the sector.
More than a third of the real estate Chapter 11 filings reported liabilities of less than $10 million as compared to 3% for other industries. That reflects the smaller size and profile of the single asset holding companies that tend to use Chapter 11.
The issues in the real estate sector are not limited to smaller assets. Larger distressed assets in the sector have been more successful at arranging out-of-court workouts and avoiding the cost and complications of an in-court proceeding. Given that larger real estate deals tend to be private and remain out of court, the level of real estate restructuring activity relative to other sectors is likely higher than what is reflected in the Chapter 11 filings.
Despite several highly publicized efforts by large companies to get their employees to return to the office, remote and hybrid working arrangements continue to have strong appeal. Demand for office space is likely to continue to be weak compared to pre-COVID-19 levels. High demand for residential real estate has some owners looking to convert underutilized office assets as a solution. These conversions come with significant architectural, engineering and design challenges that require substantial investments — all of which limit the viability of this option.
2025 outlook
High interest rates have hurt companies with weak operating cash flows and overall we expect an upswing in the number of bankruptcies. Some companies that have struggled with higher rates, however, will seek out-of-court restructurings through increasingly popular liability management transactions. We also expect distressed activity in the real estate sector to continue, though many of those transactions tend to follow consensual out-of-court workouts as opposed to large Chapter 11 proceedings.
The prospect of a less-regulated environment — which likely will take months to materialize in the form of regulatory and legal changes under a new administration — may provide some relief for stressed companies.
Changes to the economic and regulatory environment, however, aren’t a cure for every weak balance sheet, especially in the near term. We expect restructurings — in court and outside of court — to remain at a high level through at least the first half of 2025, and perhaps longer.
Trends to watch
- Lower rates
- Regulatory changes
- New “in” and “out” industries
- Softening consumer demand
- Alternative capital strategies
Lower rates
The Fed is lowering rates, but cautiously. Central bank governors are keeping an eye on the economy and any sign of a resurgence in inflation could cause them to hit the brakes on easing. While the rate reductions from the second half of 2024 probably aren’t enough to rescue troubled balance sheets, they do make the overall financing environment friendlier. For some companies, the difference could be enough to allow them to renegotiate covenants and stay out of court.
Regulatory changes
With the Trump administration expected to be broadly more deregulatory than the previous administration, we expect that many transactions will receive less scrutiny — potentially clearing the path for companies to sell, merge or otherwise fix balance sheet problems through out-of-court deals.
On the other hand, the impact of any new tariffs could be widespread and disruptive. In some industries, tariffs could lead to higher costs and lower sales and profits. If imposed broadly enough, tariffs could also create new inflationary pressures in the overall economy.
New “in” and “out” industries
A new focus on the regulatory front, as well as shifts in tax and spending priorities, could reorient the private sector’s “more favored” and “less favored” industries. Technology, electric vehicles and alternative energy could all face new obstacles. Oil and gas, as well as other industries, however, could do well. But policy changes also take time to implement. Many companies struggling on January 1 may not be able to wait long enough to benefit from the shifts.
Softening consumer demand
Although consumer spending held up in 2024 and employment has remained relatively strong, there may be choppy waters ahead. A wave of relatively high-profile restaurant bankruptcies, for example, may signal both softening consumer spending as well as a shift in consumer priorities.
Overall, we believe many consumers — especially younger consumers — may be reorienting themselves away from pure product purchases and toward spending on experiences. In that scenario, restaurants, retailers and CPG companies with strong brands that include a compelling experiential element are likely to outperform peers without those brand attributes.
Alternative capital strategies
One thing that makes the current financial environment different from what we’ve seen in the past is the growing presence of private capital. Both private equity investors and private credit providers are able to be more flexible and creative when a company is struggling. This posture could help some firms avoid Chapter 11 and restructure out of the public’s eye.
Management teams are increasingly turning to aggressive liability management — taking advantage of borrowing friendly terms in debt agreements, for example — to favor some lenders at the expense of others. While this tactic won’t solve all balance sheet woes, it could give some companies more time to fix their problems without court oversight.
Sectors to watch in 2025
Media
Continuing shifts in consumer media consumption — away from traditional broadcasting and toward streaming, social media and on-demand content — are forcing market players to reevaluate their go-forward strategies and consider alternative options to drive growth (partnerships, joint ventures, M&A). Regulatory shifts at the FCC may also make it easier for some companies to navigate this new environment.
Biotechs
There have been a number of IPOs and large capital raises in the biotech sector over the last few years, but drug discovery is always risky and some new candidates simply haven’t worked out. As the results from disappointing studies trickle in, we could see a wave of companies filing for Chapter 11. Future regulatory shifts in federal health policy have the potential to affect both the pace of new drug approvals as well as government funding of basic research that often serves to prime the pump for new products.
Healthcare
There’s considerable pent-up demand for restructuring in the health services markets, including hospitals and clinical practices. The FTC has rigorously scrutinized M&A activity in this sector in the last few years, lowering the total volume of completed deals. With the prospect of deregulation on the horizon, some struggling providers may find ways to transact themselves out of balance sheet weakness.
Changes in health policy at the federal level could also have a major impact. Broadly speaking, more government spending and insurance mandates tend to be positive for health services providers, but less spending could create new problems for struggling providers.
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