For those who are new to us, our “Notice of Appearance” feature provides an opportunity for a professional in the field of restructuring to provide us all with some perspective about the markets generally, the industry, and professionalism. This week, we dialogued with Lance Gurley, a Managing Director on Stephens’ restructuring and special situations team.
PETITION: There has been a surprising increase in recent distressed activity in the oil and gas space. News abounds about professional retentions in E&P and companies correlated to oil and gas are filing for bankruptcy (i.e., most recently, PHI Inc.). What is this attributable to and what differences do you expect to see in the next go-around of oil and gas restructurings vs. the 2014-2017 period? What more should have been done in that first wave to ensure these companies didn't ultimately end up in (or back in, as the case may be) into bankruptcy court? Or was this just a failed option play on oil prices?
The return of restructuring work in the energy sector is, broadly speaking, tied to companies that either (a) harbored denial about the need to restructure when the market turned a few years ago, or (b) restructured poorly the first time. In the first category, a lot of bondholders have learned to be comfortable with coupon clipping as they see Boards/CEOs continue to burn their furniture hoping for a recovery on the other side and preserved equity value. These companies tend to fall somewhere between hope as a strategy and outright recalcitrance. Neither are great ways to run an enterprise with funded debt. But it’s difficult to get a board to understand that when their continued role depends on them not understanding it. In the second category, some companies restructured around a more aggressive (drilling dependent) business plan than some industry professionals saw as reasonable at the time, and never really fixed their strategy. They are more representative of the real issue in the market: many of these companies (and their new owners) had an imperfect understanding of what the market would reward in this new normal pricing environment — that cash flow is king. Just ask the average ‘back a management team’ PE investor how offloading that development play is going. Not a great time to be selling a development acreage in the supposed “core” of a new resource play.
PETITION: You're based in Texas. A significant amount of healthcare action has taken place down there. What do you make of all of the filings we're seeing in the continuing care retirement community and other specialty healthcare provider segments (e.g., behavioral health, etc.)?
Bad business models, frankly. The SQLC/Seniority filings were a great example of that: I’ve never been a fan of healthcare models that require elderly patients to, um, “move out”, in order to make way for a new dues paying member. The financial viability of the CCRC companies and the wellbeing of their patients/tenants seem to be in conflict. I’m not a healthcare professional, but playing real estate roulette with geriatric care in the balance is not an endeavor I could see working well for anyone involved (save for perhaps healthcare professionals?).
PETITION: Your firm is a middle-market oriented investment bank. What are some things you're seeing that are specific to the middle market space that give you the sense that distressed activity might pick up there? Or, alternatively, do you see a system awash with capital sparing the middle market from some needed fixes?
The middle market as we define it — $250mm to $2.5bn — seems to be turning towards malaise. More and more of the equities my research colleagues cover are trading under half of their 52-week highs; my capital markets colleagues are hearing major accounts talk of less and less deals in the market, etc. Does that mean we should all batten down the hatches for a bankruptcy bonanza? That would be wishful thinking.
Practically, that means we are using restructuring technology to solve issues a long way from the courthouse. We are seeing a deluge of liability management work, nipping and tucking balance sheets to fight for another day. Some companies will recover and some will not, but until we have a meaningful catalyst (Interest rates? Recession? Vaping finally being declared bad for your health?), it’s unlikely to be the distressed wave we experienced in the last cycle.
PETITION: We received a lot of feedback to our note in "Sears = Drama Queen. PLCE = Future Seer" wherein we noted "most of the retail chapter 22s we’ve seen have come about specifically because the restructuring were not, particularly, holistic. Similarly, we’ll see what happens in the oil and gas space: in many instances there, financial advisors weren’t even retained and in some where financial advisors were retained, the retention was for bankruptcy reporting purposes only." Where do you come out in this debate? In your view, have chapter 11 filings over the last few years accomplished all that they could in a holistic way or have they left issues lingering that should have been resolved?
I agree that many restructurings have not been as holistic as they could’ve been. Bankers and lawyers are driving deals with an intense focus on the balance sheet, and that’s healthy, but that’s left fundamental problems unsolved in many instances. Ch. 11 is a tool that can be transformative if it’s allowed to be but creditors and management teams are loathe to take their medicine on strategy when they are already justifying significant impairments to the balance sheet (especially if those strategy shifts result in further losses). That said, it’s tremendously challenging to enact change through Ch. 11 on the fly and without significant pre-planning — it’s not only too expensive, it’s too risky (like my grandfather used to say, “don’t try to clean a wood-chipper if it’s plugged in.”). If a debtor needs to reject a contract in order to implement a strategy shift, the debtor and plan support parties would be wise to put that in motion long before finding themselves past the bright line of a petition date.
At some point however, restructuring professionals have to rely on management teams that get MIPs to run companies well actually running companies well.
PETITION: Finally, for our younger readers, what book have you read that has guided you most in your career?
The books that have “guided” me are all boring, so I’ll answer perhaps what has been most influential. Someone gave me a copy of “Barbarians at the Gate” when I was an undergrad and it opened up this crazy world we work in to me. I’d highly recommend it. But I tell young people coming to work for us to read Andrew Ross Sorkin’s “Too Big to Fail.” The financial crisis was so meaningful to so many of us, I can’t imagine starting a career that interacts with the markets and not appreciating it fully.