Restructuring Becomes Pit Stop to Bankruptcy for Risky Borrowers

Robertshaw, a troubled appliance partmaker, cut two controversial financing deals last year to try to keep itself afloat. Then, this year, it filed for bankruptcy anyway.

That’s becoming a pattern, according to one analysis by Bank of America: when companies get contentious financings that give special treatment to a handful of their creditors, they still default again about 40% of the time.

The financings not only pit lenders against each other and cut into recoveries, they sometimes trigger litigation. In an economic landscape that could worsen, many investors are saying these so-called liability management exercises are a bad deal in ...