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Read MoreHas the insolvency business fundamentally changed? Absolutely. This article discusses the seven reasons why and their implications for our industry.
Owners and executives now seek input and opinions from trusted friends and professionals when their businesses encounter trouble, though that input rarely translates into action. Not that long ago, distressed professionals were almost ushered in the back door at prospective clients. Business distress and bankruptcy are no longer taboo subjects. The distressed industry is maturing and becoming more mainstream.
A few years ago, we had a secret language with 363 sales, DIP financing, administrative insolvency, preference payments, etc. Today, many more parties know the secret language (investors, suppliers, bankers, etc.), so distressed professionals must now be really good at what they do, not just know the buzzwords. Standards of performance for distressed professionals have been elevated.
This is because regulated banks simply cannot afford to hold onto distressed company debt for periods much longer than one year. The distressed debt market has mushroomed from its roots in public company debt into the previously illiquid world of private company debt. Buyers of distressed debt are quick to act, often fearless of lender liability risks, and quick to assert control if management isn’t moving fast enough to right the ship. Therefore, distressed transactions are now moving to a permanent solution much faster today.
The professional fees in bankruptcy were once viewed as a cost of doing business, regardless of how much they were, given the size of the case. There was no cost/benefit lens at all. Perhaps this was a contributing factor to what most of us agree is the ridiculously high cost of a middle market bankruptcy case. Today, at least in the middle market, all cases are subjected to a cost/benefit analysis by the secured lender and, often, by ownership, to determine whether the benefits of bankruptcy justify the costs. Therefore, we have seen a significant increase in alternatives to bankruptcy (i.e., receiverships, ABCs, Article 9 sales, out-of-court wind downs) in recent years as a cost-efficient response to the high expense of professional fees in bankruptcy cases.
Commercial banks simply can’t stay in distressed loans for multiple years anymore, for several reasons. These include pressure to downgrade loans from the OCC, the fact that bank non-performing assets are a closely watched public metric that directly affects a bank’s stock prices, and the relatively new option for banks to sell off distressed loans, no matter how small.
Companies are leveraged one to two times more today (defined as debt divided by EBITDA) than a decade ago. That is because of the abundance of capital and financiers' creativity in developing increasingly sophisticated financial structures. Highly leveraged companies, which are the norm today, have less time and fewer options to address financial distress.
The 2005 Bankruptcy Code Revisions (BAPCPA) made Chapter 11 more expensive and less likely that a middle market company could successfully execute a plan of reorganization to get a second chance at survival. Then the Stern v. Marshall case decision came down, and this has called into question in what situations bankruptcy courts can rule on issues of state law. The practical result is that alternatives to bankruptcy are on the rise, and the cases that are filed are much shorter.
In the author’s view, this translates into a comprehensive and “permanent” reduction in the market for professional services for distressed companies. Overall, the number of cases may be unaffected by the above factors, but the scope and size of cases have been significantly reduced.
Now, this doesn’t mean the insolvency industry is dying; rather, it means the new normal is fewer hours of work and lower fees per case. In the author’s estimation, the market size as measured by fees for distressed company professional services has been permanently reduced by about 30%.
We would like to thank our colleague Dan Dooley for providing insight and expertise that greatly assisted in this research.
Dan Dooley is a Senior Managing Director in J.S. Held’s Strategic Advisory Group, having joined J.S. Held in July of 2025 as part of J.S. Held's acquisition of MorrisAnderson. Dan has a strong national reputation in crisis management, operational improvement, debt refinancing & restructuring, and C-level positions. He is a frequent speaker at industry conferences and a regular author for industry periodicals. Dan has served on the Board of Directors of both the American Bankruptcy Institute (ABI) and the Turnaround Management Association (TMA). Dan was the Principal and CEO at MorrisAnderson. Prior to joining MorrisAnderson in 1997, Dan served as an executive and manager with several Fortune 500 companies, including Illinois Tool Works (ITW), Allied Signal, and Rand McNally. He has served on the Board of Directors of various businesses and non-profit organizations.
Dan can be reached at [email protected] or +1 630 660 8952.
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