Good day and welcome to WSJ Pro Bankruptcy's Daily Briefing. It's Thursday, May 22. In today's briefing, Wolfspeed shares plunged on Wednesday following reports that the chipmaker is preparing for a bankruptcy filing, with trading briefly halted amid concerns over its $6.5 billion debt and rejected out-of-court restructuring offers. Meanwhile, Citgo cleared a key hurdle in its auction after a U.S. district judge ruled that the refiner’s parent company isn't liable for around $1.5 billion in PDVSA debt.

Wolfspeed’s shares fell nearly 60% on Wednesday after The Wall Street Journal reported that the company is preparing to file for bankruptcy within weeks.

The U.S. chip component maker closed at $1.24 a share on Wednesday, down from its Tuesday close price of $3.13. The shares fell rapidly enough for the New York Stock Exchange to halt trading on Wednesday.

Wolfspeed has passed on multiple lender proposals to restructure its $6.5 billion debt pile out of court, and is working toward a prepackaged chapter 11 plan, sources previously told the Journal.

The company is eligible for $750 million in taxpayer funding through the 2022 CHIPs Act, but first must restructure its convertible notes maturing in 2026, 2028 and 2029.

–Alicia McElhaney

Susquehanna analysts noted earlier this month that “fundamentals remain weak for Wolfspeed as 200mm wafers from the JP fail to take off and demand for devices remains depressed.” The company operates a manufacturing center in North Carolina known as the JP.

TD Cowen analysts suspended their rating and price target for Wolfspeed’s stock earlier this month because of its “increasing likelihood of financial restructuring.” Wolfspeed said on its earnings call that it didn’t anticipate its debt negotiations to materially impact stakeholders but that it expected to add “going-concern language in the footnotes to the financial statements” of its 10-Q regulatory filing because it was considering pursuing “either in-court or out-of-court options” as part of the negotiations.

“Wolfspeed is positioned to help achieve some of this administration’s important initiatives, leading the American semiconductor revolution, reassuring the manufacturing of critical mineral derivatives, boosting domestic production of technologies critical to national security and securing domestic supply chain,” Chair Tom Werner said on the company’s earnings call.

–Britney Nguyen

Citgo Petroleum cleared a major hurdle in its court-mandated auction after a ruling denied creditors’ efforts to hold its parent company liable for certain claims.

On Tuesday, U.S. District Judge Jed S. Rakoff of the Southern District of New York ruled that Citgo and its parent company, U.S.-based PDV Holding, is not on the hook for liabilities owed by state-owned Petróleos de Venezuela SA. A group of creditors, including emerging-markets fund Gramercy, has said that PDVH owes it repayment of some $1.5 billion in notes that were issued in 2016 and 2017.

A ruling in favor of those creditors could have “meaningfully disrupted” the Citgo sale process, which is expected to wrap up next week, according to a note by Jason Keene, an emerging-markets sovereign credit strategist at Barclays.

Judge Rakoff will issue an opinion to outline his reasons for this ruling soon, according to an order filed Tuesday.

While the ruling addressed one outstanding risk to the sale process’s completion, Citgo must still contend with a separate legal fight. A group of investors in bonds that matured in 2020 allege that they also have claims against the company. If they win, they would be awarded a 50.1% stake in Citgo and would have a say in the company’s future.

–Alicia McElhaney

Shares of B. Riley Financial advanced after the company said it reached a deal to cut its outstanding debt by about $46 million.

The stock advanced 4.6% to $3.42 in the morning session.

The financial services company said before the bell that it has entered into an agreement with an institutional investor to exchange about $139 million in senior notes due over the next few years for $93 million in notes that have an 8% interest rate and are due Jan. 1, 2028.

B. Riley is also issuing the investor warrants to buy up to 372,000 shares at $10 apiece within the next seven years.

The significant drop in near-term debt is an important step forward for the company, Co-Chief Executive Bryant Riley said.

The shares have fallen more than 96% since they hit a high of $88.86 at the end of 2021. The firm suspended its dividend last August and came under even more pressure after Franchise Group, the holding company for the Vitamin Shoppe that B. Riley was heavily invested in, filed for bankruptcy in November.

The company has been working to reshape its capital structure and has sold a majority of appraisal- and valuations-unit Great American to Oaktree Capital last year, as well as part of its traditional W-2 wealth-management business to Stifel Financial.

–Dean Seal

Target’s troubles are mounting.

The retail company said a laundry list of problems dragged down its quarterly sales, including a boycott by shoppers who disagreed with its decision this year to end some diversity programs.

Target’s sales have been tepid for years. In the three months ended May 3, they got even worse, with comparable sales falling 3.8%—a steeper drop than analysts expected. The company Wednesday lowered its financial forecast for the fiscal year, citing uncertainty around tariffs, the economy and consumer demand.

“We’re not satisfied with these results,” Target Chief Executive Brian Cornell said on a call with reporters.

Investment bank loans to private-credit firms could pose a growing risk to the stability of the financial system, according to economists from the Federal Reserve Bank of Boston.

The private-credit industry’s rapid expansion has been accompanied by rising bank lending to the industry, including loans to firms and business development companies, or BDCs, that act as nonbank lenders. Banks often finance this lending by nonbanks.

This tandem growth could be a cause for concern as banks could be indirectly exposed to higher risks taken on by private-credit lenders with riskier clients that banks wouldn’t finance, according to the Boston Fed economists.

Managers of private-lending funds have no shortage of money at their disposal. The question is whether they will have enough good places to put it.

During other recent bouts of volatility and uncertainty, private-credit managers of direct-lending funds—who raise money from investors to lend to relatively risky companies—have seen surges of activity and returns. Following the Covid-19 pandemic, direct-lending activity and investment returns both soared.

So President Trump’s “Liberation Day” trade policies, and the aftershocks and uncertainty for many companies in their wake, seem like they should herald another big moment for private credit.

This time around, however, there are some crucial differences. For one, this period of volatility is coming on the heels of a surge in private-credit fundraising.

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