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Businesses in many industries could face bankruptcies amid pandemic

May 5, 2020


The situation in the U.S. and global economy continues to worsen. The impact of the COVID-19 pandemic and stay-at-home orders are putting pressure on a variety of industries – particularly oil and gas, retail, hospitality and healthcare. Waller attorneys Eric Taube, John Tishler and Jesse Vogtle have a wealth of bankruptcy experience and expect that several industries will see waves of bankruptcy filings.



This is a summary of the conversation:

This is Morgan Ribeiro, host of PointByPoint. On today's podcast, I am joined by three partners in the firm's finance and restructuring practice, Eric Taube, John Tishler and Jesse Vogtle. We're fortunate to be joined by these partners who each offer clients more than three decades of experience in bankruptcy and restructuring matters. Thanks for joining me today. The situation in the U.S. and global economy is continuing to worsen, and the impact of COVID-19 and stay at home orders are putting a lot of pressure on a variety of industries, in particular oil and gas, retail and hospitality, and healthcare. To kick things off, I think our listeners would benefit from you setting the stage for us. What are you hearing from clients right now? Eric, I'll start with you.

Eric Taube

Thanks Morgan. You know, we have clients in a multiple industries and right now the big issue is trying to figure out where the end of this is and what impact it has. Oil and gas industry is obviously being driven by some different issues, not necessarily by COVID-19, and it is in shambles based upon pricing. But other industries such as the hospitality industry and retail development and office industries are really, really in shambles and are trying to figure out where the end is.

Morgan Ribeiro

Jesse, I know your practice focuses a lot on working with banks and lenders. What are you hearing from those clients?

Jesse Vogtle

It's a very different feel from the Great Recession. Banks are truly partnering with their borrowers and their customers to try and get through this COVID-19 national, worldwide emergency. It’s not of a borrower's doing, it's not of a bank's doing. So the two parties really are not mad at each other. They're just trying to survive. And what I mean by that is that the banks are doing everything they can possibly do to partner with the SBA and open up portals to allow for these PPP monies, the payroll protection monies, to get funded. And literally the banks are getting tens of thousands of these applications. Congress just appropriated another $32 billion into that program, and the banks are doing nothing but trying to get that money out the door. There are no collection actions going on. It is strictly trying to push the money from the federal government out to them.

Morgan

Right. And John, I know you've focused on a number of industries over the years, but in the last few years, with a particular focus on healthcare, what are you hearing from that industry?

John

It's kind of the best of times and worst of times because they are on the frontline of this pandemic. A lot of the providers are, and there are tons of patients coming to facilities for assistance, but it's the worst of times in that they are not doing the things that generate the highest end of their revenue, which is a lot of elective surgeries. And a lot of the patients that are showing up are uncompensated care patients. So it's really stressing an already stressed industry, and I think there'll be some real fallout in the coming months.

Morgan

Can you talk more about that and what do you predict to happen in the healthcare services space over the next few months? Probably third and fourth quarter of this year.

John

Like the other businesses that we've already talked about, healthcare was affected by the shutdown. Hospitals, obviously, have missed out on the revenues from elective surgeries. They've also had to pay and, in a lot of instances, pay over market prices, to get just the basic PPE. And they've also had this increase of uncompensated care, partly offset by some of the government programs, but most of those programs are loans and not grants, so they'll have to be repaid. Then, when you get outside the hospital space, you look at other providers like surgery centers and post-acute healthcare facilities. Surgery centers went from having full volumes one day to having literally no one doing elective surgeries. And that's gone on for 45 to 60 days. Now you have people coming back into the surgery center centers, but very, very slowly.

So they're going to have declining volumes for at least through the end of this year, and I would predict on into 2021 as well. And on the post-acute care side, that's been ground zero for this pandemic. A lot of folks in nursing homes and assisted living have been hard-hit by this. I would imagine there will be a lot of litigation that comes out of it. Even with tort reform that may cap individual claims, you'll have multiple claims, 30, 40, 100 claims, and those kinds of things, when you put it up against an already very stressed business model, are likely to result in a lot of opportunities for well-capitalized companies, but unfortunately a lot of bankruptcies for the weaker.

Morgan

I noted earlier on in the conversation, and obviously our listeners have heard a lot about the stay at home orders, a lot of those are starting to be lifted. Things are starting to reopen, and that's a multi-phase process. But ultimately, Eric, from your position, do you think that the retail and hospitality industries are going to recover from this? They've obviously been really hurt by this in different ways. What should folks expect to see in each of those areas over the coming months?

Eric

Morgan, I think with regard to the retail and hospitality industries, you are really going to have a wave of bankruptcy filings. In the hospitality industry like hotels, occupancy rates right now for a lot of these folks are at zero or less than 5%. How long can those folks can hold on? How long can franchisors hold on without the franchisees paying their franchises? It's going to be different in terms of what your service is. It's going to create a whole different industry standard. So I expect to see a lot of hospitality bankruptcies, such as restaurants and those types of establishments that are going to be limited in terms of occupancy. The big retailers, big-box retailers, were having problems before the pandemic. So you know, you read in all the trade publications, books like Neiman Marcus and Saks Fifth Avenue and Macy's all looking at potential bankruptcy filings because they're having trouble with their lenders and can't make payments.

Same thing with regard to the developers of real estate who have multiple retail locations. I have a couple of clients who have big retail establishment developments, shopping centers. If they have 25% of their tenants paying rent right now, it's actually a lot. So how long can those folks survive, and even if the lenders are willing to be cooperative and push stuff, how long can that happen when the actual retailers can't pay rent? It doesn't look very good to me. It looks like we're going to see a number of bankruptcies in the retail, hospitality, and even in the real estate that services those areas. I don't see the next couple of months being pretty.

Morgan

I interviewed Bo Campbell, the leader of our real estate industry team, on a podcast recently to discuss the impact of the pandemic, specifically on the commercial real estate industry, but what are you hearing from developers and landlords?

Jesse

Eric states it very bluntly. Retail tenants are not paying their rent. Consequently, the landlords don't have any money to pay their loan, either, to private equity, CMBS-type lenders, or to the regulated banks. Think what's going to happen if once the government money kind of runs out and buyers start focusing on their lending relationships, I think you're going see a lot of forbearance agreements, at least attempted. I know for a fact that the banks do not want the collateral back. They're going to try to find a way to keep their borrowers performing. I think the federal government, the FDIC, in particular, are going to find ways to not create hardship for banks when they give extensions on loans. I think everybody's going to hope and pray that we have what is called a V recovery. That the economy has really good fundamentals going into this and has the ability to spring back immediately.

The real question that everyone has is, will the public go back to work? People have gotten very comfortable with this and they're kind of scared, and they're going to be very cautious. And some industries like the movie theater industry, for example, are going probably to be the hardest hit. Are people going to feel comfortable going back into that kind of an environment with this disease floating around? I think, for the time being, the banks are going to be very, very patient, and I think about June, July, August, you're going to start to see some default, probably some very weakly capitalized companies or borrowers, and that's when the bankruptcies are going to start. The people who have capital are probably going to take advantage of this and start buying up their competition. I think you'll see a lot of M&A activity start up and buying up the folks that are not well capitalized.

Eric

It's interesting today, Morgan, because today's May 1st, and so lots of people are supposed to be paying rent. My guess is most of them aren't. How does that float through, and particularly when you have lenders who can't give forbearance agreements, who are tied in, in Jesse's world, what he's talking about with banking, it's going to be tough to get those kinds of agreements done now. And May 1st is a good day to figure out when that's happening.

Morgan

Eric, you're in Texas where oil and gas is big. A plunge in prices has oil and gas dealmakers wondering if the industry will see a wave of bankruptcies and restructuring. What are your thoughts on this, and what are you hearing from clients in oil and gas?

Eric

Interestingly, as Jesse and John have mentioned, in some of these areas you have lenders who are actually being very cooperative because they don't want the asset. In other words, particularly like in the hospitality industry, if you're having to operate a hotel, a lender doesn't want to operate a hotel. That's one side of it. In oil and gas now, it's actually changing. What we're hearing is that some of the big lenders are now staffing up so that they can actually operate these assets and own them as opposed to being concerned about taking them back. Now you've got a situation where the producers can't produce because there's nowhere to put the production. Nobody wants it and there's nowhere to store it, and that's going to create some issues with regard to leases, particularly for (exploration & production) companies who have to produce in order to keep leases in place.

Eric

So it's going to be interesting. There are some big bankruptcies that have already been filed. Chesapeake, for example, is contemplating one. There's going to be some big bankruptcies in the oil and gas world, and I think unlike what we've seen in the past, you're going to see lenders actually take over these assets. Or you may have some contested bankruptcies where the lender wants the property posted.

Jesse

The unknown at this point is that when the lenders via private equity or banks start taking action, the borrowers have defenses and it remains to be seen how the term "force majeure" is going to be interpreted by the courts. My counsel, and the takeaway from this, is if somebody is being aggressive with you, you probably should seek counsel's help to help you understand your rights and potential defenses to some of these actions. We need to remember that nobody's going to work because the federal and state governments deemed it so, and it wasn't anything that we did to cause this, but I'd be really interested to see how the courts are going to deal with aggressive behavior by lenders.

Eric

Borrowers on the the developer side are stuck between a rock and a hard place. As I was talking about earlier with regard to retail, you've got retail developers who've got loans that have to be paid. Their lessees can't pay and aren't paying, and they're going back to their lenders and they're asking for time and help getting through the pandemic to see if it changes. With CMBS lenders, as most of us know, you don't really have the ability to talk to anybody. You have to go to a special servicer. It takes some time. They really don't have any discretion, so what do they have to do? I'm sure Jesse will tell me that they have to send default notices because they don't have any discretion, then we're going to be in a situation where you've got notices of defaults. It creates other defaults. Even with non-CMBS lenders, there's a sort of a domino effect of creation of these defaults, which is really going to generate some bankruptcy cases.

Morgan

A decade ago, a number of our attorneys were immersed in the Detroit bankruptcy case, and then there was also the Jefferson County bankruptcy in Birmingham, Alabama. John, do you foresee that we'll see another wave of municipal bankruptcies as a result of the current economic crisis?

John

I think, unfortunately, yes. This whole podcast has been a little bit of a downer, right? We were just talking about each industry that's going to go under, but I do think municipalities, they were already stressed. There were some notable ones like Chicago and the state of Illinois had huge unpaid pension liabilities, and now they've had to kind of fill some expensive gaps with this pandemic on PPE and other expenses that I'm sure were not budgeted. And so when you put the strain that they were already under and you add to that strain, it's easy to forecast municipal bankruptcies coming out of it. The other thing about municipalities is many counties and some cities, especially in the South, own hospitals, and these hospitals were not doing well prior to the pandemic and they're certainly not doing better on account of the pandemic.

And so, as I mentioned earlier, they're having to take loans from the government, adding to their debt load that was already pretty substantial to begin with. So those hospitals that are on the municipalities’ balance sheets are going to pull those municipalities down and probably create some filings as well. And finally, the revenue side for these municipalities is going to be hit with the tax base. A lot of companies are not going to be able to pay their taxes. A lot of people will be looking for tax breaks, and to the extent that their taxes that are based on sales, a lot of sales have fallen off pretty substantially. So you can already see a perfect storm of increased expenses and lower revenues on an already stressed economy for a lot of these municipalities. So, I believe there will be several chapter 9s in the next 12 to 18 months.

Morgan

That makes sense. I've read in some of the industry publications, some questions about whether or not companies can file for bankruptcy while simultaneously collecting federal stimulus funds. Do you all have any input or information on that?

Eric

That's a great question. Especially for us bankruptcy geeks because it's kind of a hot topic right now. There have been some conflicting rulings. So Judge David Jones, a bankruptcy judge in the Southern District in Houston, recently entered an injunction prohibiting the SBA from denying a loan to a chapter 11 debtor. There are at least two other decisions, one of which came out this morning, that are exactly the opposite. So this is definitely a very interesting topic that's going to have to get played out probably in the court of appeals.

Morgan

It seems like, in so many facets of what's going on right now, everyone's sort of learning as they go, and there are going to be a variety of different decisions made out there depending on interpretation. So I think this will continue to evolve over the coming months. It seems like, not long ago, we were facing another economic downturn, but it was very different in a lot of ways back in the 2008-2009 timeframe. What lessons can we take from that situation or other economic downturns, and what are the similarities and differences? Jesse, maybe you can take that one.

Jesse

The Great Recession was caused by a real estate bubble that left investors all over the world with housing collateral that was effectively worthless. All lending stopped and the banks spent the next five years liquidating houses at huge losses. The banks were having to reserve monies against these bad loans and it basically just stopped the banks dead in their tracks. There was no real estate lending going on at all. Today, pre-COVID-19, we didn't have that. The economy was pretty robust except for some isolated industries. Oil and gas has been talked about. Interest rates today are at an all-time low. People were doing deals pre-COVID-19 and banks had all the money in the world to fund the deals. Everybody was excited about the next couple of years. Today, the banks still want to fund the transactions and the banks have plenty of money. The problem is no one is able to do anything because of the stay at home orders. The fundamentals of the economy still exist. The real question is whether folks jump back in or cautiously remain on the sidelines before making further investments. The longer folks wait, the worse the economy will get, resulting in more bankruptcies. That's the great uncertainty. How long is this going to go on?

Morgan

John or Eric, anything to add?

John

I think there is a silver lining when you compare this to 2008. It was kind of a build-up. It had to flush through the system. It was a true economic recalibration. I don't think that's what this. It could end up there, as Jesse said, if people stay on the sidelines too long. But just as easily, there could be, once there's a vaccine and people feel like they can get back out there. The entrepreneurs will look at this and they'll see deals, and the deals will drive a lot of economic activity. The strong will get in there and buy. It'll be a buyer's market and I can see a situation, maybe it's not a V, but it may be a U. I don't know if that's the right terminology, but it's not going to go on for five years as we try to muddle through. My prediction would be the fundamentals were pretty strong. I think that once things sort themselves out - and it may have to wait on a vaccine - I think you'll see an an uptick, and I think the recovery will be pretty strong.

Eric

There are historical events that changed the course of how we live and what we do. 9/11 was one of them. I'm sure for the folks that were here after World War II, that was another. I'm not sure that we haven't seen that. I think the biggest issue for us is going to be figuring out what that change is. Then as you say, the money's there. The entrepreneurs are there. Are they reacting? What do they do? And I think that's going to be the biggest issue is trying to figure out how you adapt to the new world order based upon things that we were never concerned about. Even if there's a vaccine, I'm not sure. For example, are people going to go back to the grocery store, the way they work, or go back to big box retailers? Maybe they are worried about football stadiums and going back to football games or things like that. I think we're going to have to be adaptive and entrepreneurs will adapt. There's money there and good fundamentals - that is the difference.

John

There are healthcare companies that are are sitting on a lot of cash, a lot of dry powder, and there are going to be a huge opportunities for them to increase market share on the other side of this. To Eric's earlier point, investing in those new technologies and industries that are going to come out of this on the other side is where it's going to be important for them to be in there. I think the bankruptcy process is uniquely situated for a lot of those sales to take place. And if there's yet another silver lining to this, to the savvy and sophisticated business buyer, they understand that bankruptcy is not bad. Bankruptcy is a method and a means to an end and a means to getting assets in a way that you can't get in almost any other way. I think there will be bankruptcies, there will be bankruptcies where people are closing up, but there will also be bankruptcies that are used to facilitate transformations into where the next wave of entrepreneurial direction is taking us.

Morgan

There are just so many businesses that have been able to adapt in a matter of days into this kind of new working arrangement, so it'll definitely have an impact. But what that looks like is yet to be seen. I think there have been some negative aspects of the conversation. It can definitely be a downer to talk about bankruptcy or anything that comes along with that. But if organizations are listening to this today, are there things that they can be doing now to prepare themselves? Any tips for leaders of these organizations or boards that are tasked with setting the strategic direction of the company?

Eric

Facetiously, Morgan, my initial response was start praying. When I was a young lawyer, my dad - who was a practicing lawyer - used to tell me that rich or poor, it's good to have cash. I do think that one of the lessons that we can learn is to have dry powder. So to the extent that these opportunities are going to present themselves in the future, and they will, to the extent that you are in an adaptive situation and have to react to the new reality, having some dry powder and cash where you can be adaptive and be aggressive because of that, I think it's definitely a lesson that we should all be thinking about going forward.

Jesse

I think you're going to see the commercial real estate market change in very dynamic ways. I think you're going to see more conference room space being invested into with less individual offices. You'll probably see a lot of office sharing as opposed to having every single lawyer with a dedicated office. I think you'll see that in the accounting firms and other tenants. It's going to make the landlords and the developers repurpose the way they do business.

Morgan

Closing thoughts today?

John

I think my parting thought would be for boards of directors to become a little bit more active. There's always a tendency to defer completely to the managers of the business. And nobody has ever seen anything like this. So the more good thinking that can be brought to the management and to the operation of a business, the better that business is going to be. So if there's ever been a time for managers and board members to work collaboratively and together, this is it. Because there's going to be strategy, there are going to be emergencies, there are going to be things that people have never seen before, and the more good thinking that can be brought for a company's purposes, the better.

Eric

We're in uncharted waters. Being adaptive and having open discussion with the people that you are partners with in your business is definitely the way to go. And, as John has suggested, bankruptcies are an effective tool in certain circumstances as a means to an end, and it has the opportunity to provide a result that can be successful and is probably something that needs to be thought about in utilizing at the appropriate time. Particularly if you need cooperation that you're not getting otherwise.

Jesse

I think another takeaway from this broadcast is communication. I know that banks are in a mindset right now where they want to help. I mentioned the word partner. I did not say that lightly. I mean, really, banks and borrowers are in this together and they want to come out of it together. I think that if borrowers will take an opportunity to speak with our bankers and just let them know where they are, I think that in most circumstances, the banks will try to find a solution.


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