Distressed Dealmaking Returns as Defaults Stay Elevated

After several years in which cheap capital papered over weak balance sheets, distress is back in the deal market. Corporate bankruptcies are at their highest level since 2010, and a growing share of transactions now involve a company in some form of financial trouble. For business owners, prospective buyers, and credit investors, that change reshapes both the dangers and the opportunities on the table.

A Credit Cycle Turns

The numbers tell a consistent story. U.S. Chapter 11 filings reached a decade high in 2025, with roughly 717 corporate filings in the eleven months through November, about 14 percent above the same period a year earlier and the most since 2010. S&P Global Ratings expects the U.S. speculative-grade default rate, the share of below-investment-grade borrowers that miss payments or restructure their debt, to stay historically elevated through 2026, with forecasts clustered in the high-3 to low-4 percent range.

That headline figure actually understates the strain. A large portion of recent activity takes the form of distressed exchanges and out-of-court restructurings, where a company renegotiates terms directly with its lenders rather than filing for bankruptcy. These workouts keep some businesses out of the official tally even as they signal real financial pressure.

The pressure is not evenly spread. Consumer discretionary names, particularly retail and casual dining, are among the most exposed, squeezed by higher labor and food costs and softer foot traffic. Among the largest filings, those by companies reporting more than $100 million in assets, manufacturing and industrial businesses have accounted for the biggest share.

Inside the Marquee Case

No single situation captures the moment better than First Brands Group, the auto-parts maker behind brands including Autolite, Brake Parts Inc., and Cardone. First Brands filed for Chapter 11 in September 2025 in the U.S. Bankruptcy Court for the Southern District of Texas, and the case has become a reference point for what a credit downturn exposes.

The scale of the leverage surprised the market. First Brands carried roughly $6 billion of on-balance-sheet debt, plus an estimated $2.4 billion of borrowing held in special-purpose vehicles, separate legal entities that keep obligations off the parent company's books, and about $800 million in supply-chain financing. Allegations of fraud followed quickly. Lenders asserted that the same collateral had been pledged more than once, and investigators reportedly found fabricated invoices and duplicate sales to multiple factoring firms, the companies that buy a business's receivables for cash up front. In January 2026, federal prosecutors brought criminal charges against the former chief executive and his brother.

The estate is now winding down several units and selling assets in pieces, including the court-approved sale of its Horizon North America business to an affiliate of Flex-N-Gate. The episode is a reminder that the debt which does the most damage is often the debt that does not appear on a standard balance sheet.

How Distressed Deals Work Differently

Buying a troubled company is not a slower version of a healthy acquisition. It runs on different rules. Many distressed sales happen through a Section 363 sale, named for the provision of the bankruptcy code that lets a company sell assets through the court free and clear of most existing liens and claims. Buyers value that structure because they can acquire the operations without inheriting most of the seller's debts.

Two features stand out. Secured lenders can credit bid, using the debt they are already owed as currency to buy back the collateral, which sets a floor on price and can outmaneuver outside bidders. And timing matters more than in an ordinary sale, because auctions run on the court's calendar; a buyer with committed financing and a credit team that can move quickly holds a real advantage over one still arranging capital.

The protections are powerful but not absolute. Successor liability, the principle that a buyer can be held responsible for certain obligations of the seller such as some environmental, pension, or product claims, can survive a sale that is otherwise free and clear. Customer and supplier relationships also need attention, since a brand that has been through a public failure carries reputational and retention risk that a financial model will not capture on its own.

What It Means for Owners

For owners of healthy businesses in pressured sectors, the signal is to act before strain hardens into a forced sale. Lenders are far more willing to work with a borrower who arrives early with a credible plan than one who waits until a loan covenant is already breached. The practical work is straightforward: stress-test liquidity against a downside scenario, map your debt maturities so nothing surprises you, account honestly for off-balance-sheet commitments and guarantees, and engage restructuring advisors while you still have a full menu of options rather than a single exit.

There is a quieter implication for owners thinking about selling. A clean, well-documented balance sheet now commands a premium, precisely because buyers have grown wary of hidden leverage. The same diligence that protects a buyer rewards a seller who can show there are no surprises beneath the surface.

What It Means for Buyers and Investors

On the other side of the table, distressed and special-situations strategies are drawing fresh capital while traditional exits remain slow. Private credit funds, which financed much of the last expansion, increasingly sit on both sides of these deals, negotiating restructurings as lenders and acquiring assets as buyers. That dual role concentrates both opportunity and risk.

The opportunity carries a heavier diligence burden than a standard deal. A buyer needs to confirm what debt actually exists, including obligations parked in special-purpose vehicles and tied up in factoring, verify that collateral has not been pledged twice, and price in successor-liability exposure and the operational cost of stabilizing a business that has been under stress. First Brands is an extreme illustration, but the underlying discipline applies to every distressed target: trust the documents only after you have tested them.

Looking ahead, a few trends are worth watching. Consumer discretionary and parts of the industrial economy are likely to stay under pressure. Private credit will face its first genuine downturn as a dominant force in corporate lending, and how it manages workouts will shape recoveries across the market. And the steady use of out-of-court restructurings will continue to absorb strain that might otherwise surface as filings, which means the official default rate is best read as a floor rather than a full picture.