I Sat Through a Corporate Debt Restructuring as a Bondholder and It Was Terrifying

the phone call from my broker at 4:58 PM

I was driving home from my office in Century City, Los Angeles, when my phone rang. It was David Chen, the fixed income specialist at Charles Schwab who managed the bond portion of my portfolio. He told me that Redwood Commercial REIT had filed for Chapter 11 bankruptcy protection at 4:47 PM Eastern time. I owned $85,000 face value of Redwood's 6.75% senior unsecured notes due 2030. I had purchased them at 97 cents on the dollar in March 2025, attracted by the yield and the company's seemingly stable portfolio of office buildings in Seattle, Portland, and San Francisco. The bonds had been rated BBB- by S&P when I snagged them. Three months before the filing, they had been downgraded to B+ with a negative outlook. I had seen the downgrade. I did nothin. David told me that trading in the bonds would be suspended pending the bankruptcy court's decisions. My $85,000 was frozen. I pulled into my garage an sat in the car for twenty minutes.

why Redwood collapsed

Redwood Commercial REIT owned fourteen office buildings with a combined value of $2.1 billion at the end of 2024. The problem was that office vacancy rates in their three core markets had risen from 12% in 2022 to 28% in Q1 2026. Rental income dropped 34% in two years. The company's total debt stood at $1.6 billion, with $340 million in secured mortgage debt an $1.26 billion in unsecured bonds like mine. The interest expense alone was $107 million annually on revenues that had fallen to $89 million in 2025. They were paying more in interest than they were collecting in rent. This is the math that kills real estate companies. I had poked at the financials in January when the downgrade hit an convinced myself that the secured debt would take the first loss and my senior unsecured notes would be protected. I was half right. The secured lenders would be made whole in the restructuring. The unsecured bondholders, including me, were about to get a lesson in the absolute priority rule and its exceptions.

the bankruptcy process explained in pain

Chapter 11 is not liquidation. It is reorganization. The company continues operating while it negotiates a plan of reorganization with its creditors. Redwood retained Lazard as its financial advisor an Kirkland & Ellis as its bankruptcy counsel. The first creditor meeting was scheduled for March 28, 2026, in Wilmington, Delaware, where the case was filed. I could attend by phone. I did. There were approximately 400 participants on the call, representing bondholders, banks, vendors, and landlords. The company's lawyer presented a timeline: the restructuring would take twelve to eighteen months. Twelve to eighteen months during which my $85,000 would earn nah interest and could not be sold. I jotted down the key dates an deadlines from the call an grasped that this was going to be a long, slow, expensive process. The bankruptcy legal fees alone were estimated at $28 million, all of which would be dropped from the estate before any creditor received a single dollar of recovery.

the recovery estimate that ruined my week

Lazard issued a valuation analysis in April 2026 as part of the restructuring process. Their estimate of the enterprise value of Redwood's fourteen buildings ranged from $1.1 billion to $1.4 billion. Total debt was $1.6 billion. Even at the high end of the valuation, the company was insolvent by approximately $200 million. The proposed plan of reorganization allocated recoveries by class. Secured mortgage lenders would receive 100 cents on the dollar plus accrued interest. Senior unsecured bondholders would receive a recovery of 35 to 45 cents on the dollar, dropped partly in cash an partly in fresh equity in the reorganized company. My $85,000 face value was abruptly worth between $29,750 an $38,250, a loss of $46,750 to $55,250. I had snagged the bonds thinking they were a safe income investment yielding 6.75%. Rather, I had taken on equity-level risk disguised as fixed income. I banged out an angry email to my broker that night asking why he hadn't flagged the rising vacancy rates an deteriorating coverage ratios sooner. He replied the next mornin with a polite but firm explanation that bond analysis was my responsibility an that he had advised diversification across at least twenty issuers. I held bonds from only six issuers. Redwood was 28% of my fixed income allocation. The concentration was my fault entirely.

what this taught me about credit risk

I laid out four weeks after the filing reading everything I could find about corporate bankruptcy and creditor recoveries. The data was sobering. Average recovery rates for senior unsecured bonds in Chapter 11 cases filed between 2020 and 2025 ranged from 35% to 55%, depending on the industry and the capital structure. Real estate companies tended toward the lower end because their assets are illiquid an arduous to sell in distressed markets. I had been treating corporate bonds as a safe asset class because they sit above equities in the capital structure. They are safer than stocks. They are not safe. A 45% loss on a bond investment is devastating, especially when you were counting on the income to fund living expenses. I had planned to use the $5,738 in annual interest from my Redwood bonds to help cover property taxes on a vacation condo I own in Palm Springs. That income was gone. I would need to find another $5,738 per year from somewhere, which meant either cutting spending or selling something.

restructuring my own debt to create breathing room

The Redwood loss forced me to confront my own balance sheet. I owed $218,000 on my primary residence in Santa Monica at 5.625% interest. The Palm Springs condo carried a balance of $142,000 at 6.75%. Combined mortgage payments were $3,180 per month. I talked thru the situation with a mortgage broker named Angela Ruiz in Irvine who suggested I look into an FHA loan cash-out refinance on the Santa Monica property to consolidate both mortgages into one payment at a lower rate. The FHA loan program allowed me to borrow up to 85% of the home's appraised value of $920,000, which meant a maximum loan of $782,000. After paying off both existing mortgages an closing costs of approximately $8,400, I would have approximately $400,000 in cash remaining. I could put $100,000 into a high-yield savings account at 4.35% earning $4,350 per year, which would nearly replace the lost bond income. The fresh FHA loan at 5.375% would reduce my combined monthly payment by approximately $640. The PMI would add about $180 per month since the loan-to-value ratio exceeded 80%. Even with PMI, the net savings were real. I haven't pulled the trigger yet.

the Palm Springs condo decision I keep postponing

The vacation condo in Palm Springs was a purchase I made in 2021 for $410,000 with a $285,000 mortgage at 3.25%. It was sposed to generate $2,800 per month in Airbnb rental income. By 2026, short-term rental bookings in Palm Springs had dropped 22% according to AirDNA data, and my actual rental income averaged only $1,900 per month after cleaning fees and platform commissions. I was negative $340 per month on the property when accounting for the mortgage, HOA fees of $485, and property taxes of $4,200 per year. The Redwood bankruptcy meant I no longer had the bond income to subsidize that loss. My realtor in Palm Springs, a woman named Diana Voss, listed comparable units at $385,000 to $395,000. Selling would mean realizing a $15,000 to $25,000 loss after closing costs. Gripping meant bleeding $340 per month indefinitely. I am still running the numbers.

But the Redwood bankruptcy forced a conversation about my finances that I had been avoiding for two years. Sometimes a loss is the only thing that creates clarity.