New York: A Bankruptcy Litigation Overview

The post-COVID-19 pandemic lull in restructuring activity is now firmly in the rear-view mirror. After subdued filing levels in 2021 and 2022, the filing of large Chapter-11 cases rebounded in 2023 and has remained elevated through 2026. At the same time, the increasing popularity of liability management transactions is responsible for a wave of litigation that can take place before, during and even after a Chapter-11 case. Yet even amidst this heightened activity, numerous signals suggest that the current cycle could continue for some time.

Persistence of High Interest Rates

Interest rates remain meaningfully elevated. In recent months, the yield on the 30-year Treasury bond has hovered around 5%, which is around the highest level seen since the global financial crisis and more than double the ultra-low rates that prevailed in the immediate post-pandemic period. While many market observers had expected the Fed to cut rates in 2026, there have thus far been no rate cuts this year, and there is growing speculation that the Fed may hold off on any further cuts as inflation has remained stubbornly above 3%. Many sponsors and corporate borrowers took advantage of the low rates available in the immediate wake of COVID-19. As that debt matures in the next few years, borrowers may find that they cannot refinance their capital structures at existing rates. This could lead borrowers to pursue liability management strategies or seek comprehensive balance-sheet restructurings.

Middle East Conflict

The conflict between the United States, Israel and Iran has upended global energy markets. The price of WTI crude now hovers at or over USD100 per barrel, reflecting a near-doubling in the price of oil since the beginning of the year (USD57 per barrel for WTI crude). These high fuel costs put pressure on borrowers whose operations depend heavily on oil and gas inputs. Aviation, trucking, shipping, petrochemical/plastics, and other energy-intensive industries are likely to face a heightened liquidity strain and increased restructuring risk so long as disruptions to the global energy supply chain persist.

AI-Driven Restructurings

Many industries face disruption from the rapid adoption of AI tools. Businesses and consumers are increasingly using AI-powered platforms to address their needs that previously required higher-cost standalone software products or service providers. As a result, while public equity markets remain near all-time highs, software companies have seen their share prices meaningfully decline in 2026 as investors expect a continuing pullback from increasingly commoditized software services. If those expectations are realized, the software sector and other industries prone to AI disruption may see a meaningful uptick in restructuring activity.

Private Credit Turmoil

Following years of explosive growth, in 2026 the private credit market began to show signs of strain. A number of leading private credit asset managers suffered billions in redemption requests as concerns over performance and liquidity in the sector have intensified. Many large private credit managers have also seen their stock prices decline substantially in 2026. While many market observers believe the concerns relating to the private credit sector are overblown, there has been a recent spate of redemptions and pullback in the public equity markets. Moreover, distress in this space may prompt maneuvers that could result in contentious workouts and litigation.

Liability Management and Risk of Litigation

Over the last year, the trend has continued of borrowers (especially sponsor-backed borrowers) relying on liability-management transactions or “exercises” (LMEs) to obtain liquidity and avoid (or at least forestall) in-court restructurings. These transactions typically involve the borrower taking advantage of loose restrictions in its credit agreement and agreeing with existing lenders (or more often a subset of those lenders) to obtain incremental liquidity or runway. This can include loans extended on a structurally or contractually senior basis, possibly paired with an exchange of the existing debt held by those participating lenders into a new tranche of senior debt. Increasingly, lenders have formally entered into so-called “cooperation agreements” to resist efforts to create competition among them. Under these cooperation agreements, lenders agree only to deal with the debtor as a collective. More recent iterations of these agreements have introduced more complex features, such as various layers of participation, each with differing rights – eg, economics and control, depending on a lender’s size or time of joining the agreement. This evolution of cooperation agreements itself has spawned additional types of litigation, including lawsuits alleging contract or tort claims, and more recently assertions of violations of antitrust laws. The resolution of these litigated disputes may provide guidance to the market on what is permissible and not permissible in the realm of liability management strategies.

Commercial Real Estate Distress

The growing shift towards work-from-home and more flexible work structures has put pressure on the market for commercial office space. For years following the pandemic, investors held on to their troubled office assets, agreeing to put in more equity or negotiating extensions to their credit agreements while they hoped for a full return of the pre-pandemic office market. In 2026, many of these investors and their lenders appear to be unwilling to wait any longer (or incapable of waiting). In major markets such as Denver, Chicago and Washington, DC, reports abound of large-scale office buildings selling for pennies on the dollar relative to where those assets traded years ago. In the face of these unfavorable market dynamics, a wave of distressed sales and workouts in the commercial office space seems likely as pre-pandemic loans come due.

Taken together, these dynamics suggest that the current wave of elevated restructuring activity – and attendant litigation activity – will continue to require niche expertise.