BANKRUPTCY


Third Quarter Marked by Uncertainty for Puerto Rico and Slower Retail Sector

In the last month, the world has changed for Puerto Rico, affecting its people, its economy and its restructuring.

The Title III cases have been put briefly on hold as the commonwealth tries to rebound from the grave humanitarian crisis it now faces. But questions about what will happen next in its efforts to restructure and pull itself out of economic turmoil have begun to surface.

Although little is known currently about how the devastation will ultimately affect Puerto Rico's economic restructuring, Moody's Investors Services said in a recent report that the commonwealth is tasked with "new risks and economic uncertainty."

"Given Puerto Rico's weakened cash position and lack of capital market access, the territory's government will face challenges to the extent that it needs to contribute its own funds toward recovery efforts. Puerto Rico's oversight board authorized the governor to reallocate as much as $1 billion of its current budget for disaster-related spending. Puerto Rico's massive and contentious debt restructuring under PROMESA may influence how much funding Congress authorizes for relief efforts," Moody's said.

Additionally, if power remains off for an extended period, Puerto Rico's bankrupt electric utility will incur revenue losses and lack of power could further undermine Puerto Rico's economy, Moody's added.

The situation in Puerto Rico has escalated from difficult restructuring to full-fledged crisis and will continue to unfold through the end of the year and long into the future.

The year so far has also been known for the significant shakeout seen in the retail world. However, during the third quarter, much of that action slowed down. Retail restructurings are likely to continue at a slowed pace through the end of the year as the holiday season approaches.

"Don't expect to see a lot of retailers filing between now and Christmas," said Michael C. Eisenband of FTI Consulting, which came in first on The Deal's league table for bankruptcy restructuring advisers.

Robert S. Brady of Young Conaway Stargatt & Taylor LLP, which is tied for third on the league table of law firms in terms of number of engagements this year, agrees.

"Most retailers try to avoid filing as we get closer to the holiday season," he said. Instead, they wait for holiday results to roll in and file for bankruptcy during the first or second quarters if they have to.

"I think most try to kick the can down the road," Brady added.

There is one huge and notable exception - Toys "R" Us Inc., which filed for bankruptcy on Sept. 18 with more than $7 billion in liabilities.

A bankruptcy filing by a retailer in September? "Rare!" Eisenband said.

The story was different for Toys because a report leaked out that the company was considering bankruptcy, and overnight its vendors began to demand cash on delivery. In desperate need of liquidity, Toys filed for bankruptcy.

"It's like a 1990s retail filing," Eisenband said of Toys, explaining that today, it's uncommon for a retailer to enter a so-called "freefall" bankruptcy, without a lender or bondholder agreement already in place. Toys, as liquidity dried up, had no choice but to file immediately, in the style of Macy's and other retailers that restructured in the 1990s.

It's uncommon to enter bankruptcy without a deal already in place because it's hard for retailers to weather bankruptcy now without one.

The rate of retail liquidations in bankruptcy is double that of non-retailers that file for Chapter 11, FTI's Eisenband said.

Michael Nestor, also of Young Conaway, added that the retailer's chances of viability and success in Chapter 11 are lessened when "the retailer doesn't invest resources prior to a filing."

Nestor also notes that while it's less common to see retail filings this time of year, it does happen. He pointed to the liquidation of The Limited last year as one example, noting that the holidays are a good time of year to run liquidation sales.

"We're still seeing a lot of activity in that area," he added.
A Sept. 20 report by Fitch Ratings supported Nestor's assessment.

Sears Holdings Inc., Nine West Holdings Corp., TOMS Shoes LLC, Everest Holdings LLC, Charlotte Russe Inc. and Charming Charlie LLC are all names that Fitch said could default before 2017 ends.

If 2017 was the year of retail and 2016 was oil and gas -- there's been some talk that hammer is falling on the healthcare sector in 2018. However, few think the trouble there will rise to the levels seen in retail and oil in recent years.

Turmoil in the healthcare industry is largely caused by changes to government reimbursement rates.

William L. Norton of Bradley Arant Boult Cummings LLP, who is currently handling the Chapter 11 case of a long-term care facility, explained that the financial problems for the facility wasn't caused by operational problems -- rather funding has dried up to the industry.

"Their operational is doing well. Their struggle is in getting financing," Norton said. "Projecting five years out, you just don't know what the government is going to do. That uncertainty is making it hard for them to get financing and long-term loans," he said.

Despite this, distress through the rest of the year and into 2018 is more likely to target specific companies, rather than specific industries.

"I don't think there's any particular industry that's poking their head into our office right now," Young Conaway's Nestor said.

"We know of a whole slew of decent size cases that are going to be filing over the next few months" that aren't retailers, FTI's Eisenband added. "There's no one industry that's going to jump out.

This article was produced by the staff of The Deal, a financial intelligence service that provides actionable information on deals and dealmakers, offering over 100,000 users the unique opportunity to find potential deals and target dealmakers.