What Comes Next? (Healthcare? More Oil & Gas? More Retail?)

Oil and gas exploration and production is SO 2016. Everyone is sick of 2017's #retailapocalypse. So, now what? 

The above notwithstanding, there are many who believe that oil restructurings will hit again if (when?) oil dips below $40/barrel again. Early reorganizations that didn't delever enough or didn't tackle bloated SG&A will need a solution - even if just to stay competitive with companies that did, in fact, file and clean themselves up (though, based on the recent trading levels of post-reorg equities, some of those guys aren't doing so hot either; notably, none of them have gotten the support of a large institutional sponsor behind them). And some Chapter 22s may start rolling in too. 

On the retail side, November is not too far away. If retailers can't bridge themselves to Q4/Q1 by this point, they're probably beyond repair. 

In the meantime, restructuring professionals are earnestly turning their attention to "healthcare" - a catch-all category that subsumes various subsegments like biotech, pharma, and medical services. Industry decks have been circulating around like wildfire to the point where we have a pool as to whether we'll read more banker/advisor decks in the next 12 months than we'll see meaningful bankruptcies in that time (who wants in?). Leading indicator of hype-flow: the panels are starting. Last Monday there was a New York City Bar panel on healthcare issues.

So far in 2017, there have been a number of healthcare-related bankruptcies spanning across the various subsegments including, among others, 21st Century OncologyAdeptus Health Inc.Halt Medical Inc.Bostwick Laboratories Inc.Unilife Corporation, and California Proton Treatment Center. There have been a number of smaller deals too but those don't ramp up advisory fees, e.g., this one from this week. Healthcare services providers have also been hurt, e.g., Angelica Corporation. And there are tons of other sizable healthcare names on distressed watchlists - though it's unclear whether they'll ultimately file for bankruptcy, e.g., Pernix Therapeutics ($PTX), HCR Manorcare (Carlyle Group owned), and Concordia International Corp. ($CXRX).

Getting out ahead of all of this, some Kramer Levin Naftalis & Frankel LLP attorneys released a recent thought-piece issuing a "Code Red" for the healthcare industry. They delineate the various reasons why healthcare is the new hot thing - from uncertainty around the ACA/AHCA (even with this week's release of Trumpcare Senate-version) to reimbursement pressure from Medicare to the change to bundled payments (rather than "fee for service" payments) to unsustainable capital structures emanating out of debt-driven acquisitions. A "Code Red" ladies and gentlemen. Hold on to your butts. 

Now, there are unique considerations that apply to healthcare restructurings - one among them the likelihood of the appointment of a Patient Care Ombudsman - which just means that there'll be another contingent of estate-sponsored advisors soaking up fees. That prospect alone probably gets juices flowing. Professionals love tables with a lot of seats around them. 

But, most of the companies highlighted in decks don't have maturities until 2019 or 2020 and so this has to, in the near-term, be a liquidity/covenant story...? Maybe. And it's unclear how that story will unfold - particularly with so much regulatory overhang. We're wondering if all of the current focus on healthcare is more hype than substance and maybe is a bit premature...? What do you think?

On an aside, we read stuff like this and it makes us less inclined to make jokes and more inclined to beat someone's a$$. This is people's health we're talking about and so it's disconcerting to see physicians speaking openly and publicly about deficiencies that are sparked by the need to service debt.  

Want to tell us we're morons? Or praise us? Cool, either way: email us

What About the Children?

This was a big (bankruptcy) week for oil field servicers. 

After months of upstream idling and cost cutting, expert predictions of a cascade through the midstream space finally came true with a trio of prepackaged bankruptcy cases: Key Energy Services Inc.Basic Energy Services and American Gilsonite. With oil mired in the $50/barrel range, upstream producers cut capex, competitive servicers cut pricing, and suddenly - in the example of Key Energy - $1b in funded debt became entirely unsustainable. Shocker.   

And yet Key's bankruptcy papers paint a picture of...success?!? Sure, we'll give some credit: a consensual prepackaged case with a two-month timeline is a shining star in an industry rife with supposed prearranged deals that descend quicker into chaos than Donald Trump at a presidential debate (we're looking at you Samson Resources, Sabine, and Midstates Petroleum). But let's not lose perspective here... 

Platinum Equity will come out as the largest equity holder. Various creditors will swap their debt for equity. Chevron will continue to receive services. Shareholders? C'mon. Key was a publicly-traded company. No one cares. 

J. Marshall Dodsen, CFO of Key, noted that Key undertook dramatic measures to stave off bankruptcy including shutting down business lines, selling assets, and riffing employees like nobody's business. He laid off 55% of the workforce. Some quick math here: 2900 employees remain...55% gone...carry the one...yup, 1600 employees axed. What a hero. 

Notably, Basic Energy's papers highlight a 30% headcount reduction as compared to 2014 (read: before oil cratered). While American Gilsonite noted that firings were part of its pre-filing cost-cutting strategy, it spared us from the exactitude. Outside of the bankruptcy court, we learned this week - in the context of reporting a $429mm net loss - that Baker Hughes has eliminated nearly 25,000 jobs during this commodity-price downturn. 

Sadly, nobody is earnestly talking about the real world implications of this debt-laden SG&A-ridden cowboy culture collapsing before our very eyes. But they should be. Because clearly people are losing jobs. Lots of people. 

It doesn't stop there. We singled out Samson and Midstates for a reason. And that's because Oklahoma is a complete and utter hot mess right now. Aside from lining biglaw and advisory pockets, these cases (and, of course, the oil price decline generally) have had other very real consequences. We recommend that you watch the 10/21/16 episode of Vice News on HBO for more detail but, suffice it to say, the oil bust is hitting the children. Lost oil revenue has destroyed school budgets and this means fewer school days for Oklahoma kids. To make up for this, the state is proposing a sales tax increase that would propel Oklahoma to the top of the combined state/local tax rates. If there is no other explanation for this crazy election season, there is this: people do desperate things when children are involved.

The restructuring industry is abuzz about this week's uptick in filings after a relatively slow Q3. But there are bigger forces at play here. Let's hope those Oklahoma children are safe when the next big force of an earthquake strikes.