Energy, Healthcare Will Be Most Active Restructuring Out of Court

Energy and healthcare companies will be the most active businesses seeking out-of court restructurings during the fourth quarter and into next year, according to insolvency and restructuring attorneys.

"I think we're in a cycle in which we are still seeing some oil, gas and other energy companies seek out-of court restructurings," said Peter Gilhuly, co-chair of the restructuring, insolvency and workouts practice at Latham & Watkins LLP, which ranks second on the list of distressed counsels.

A recent increase in energy company out-of-court restructurings has been somewhat unexpected, said Marshall Huebner, head of the insolvency and restructuring group at Davis Polk & Wardwell LLP (ranked third among distressed counsels).

"Out-of-court restructurings for some power companies was anticipated," Huebner said. "But exploration and production companies had been counting on an uptick in pricing. They have not seen that salvation of price increases arriving"

West Texas Intermediate crude oil has fallen from about $105 a barrel in June 2014 to $51.93 on Tuesday, Sept. 26. Henry Hub natural gas prices fell from $4.59 per MMBtu to 2.92 MMBtu in the same period.

"After Hurricane Harvey hit Houston, it's been wait and see on the effects of the storm on the industry. The kinds of one-time problems and losses that would come from Harvey are the kinds of shocks you can often handle out of court," said Lisa M. Schweitzer of Cleary Gottlieb Steen & Hamilton LLP (No. 4 rank of distressed counsels).

"In many cases, retail companies don't make sense for out-of-court restructurings. A lot of the retailers in distress are failed business models that need to be sold or liquidated in Chapter 11," Gilhuly said.

"I see no new or emerging area that will become dominant in out-of-court restructurings over the next quarter," Gilhuly said. "It will be more of a smattering of industries seeking out of court restructurings, not just one or two."

Huebner said retailers cannot easily be restructured out of court - and several are already in with others likely on the way in.

"Retailers typically have to reject leases in a restructuring, which requires a Chapter 11 filing. Also, to reinvent yourself, you need an infusion of significant capital, which is often only available from debtor-in-possession financing under Chapter 11," Huebner said.

However, retail will still be an industry considering out of court restructurings, said Schweitzer.

"Retail continues to look for out of court solutions," said Schweitzer. "J Crew and Neiman Marcus are two examples of retailers that undertook recent restructurings."

Neiman Marcus began its restructuring of massive debt in March, while J. Crew in July completed a restructuring which included a $3.6 billion bond exchange and a restructuring of $1.5 billion in term loan debt.

Other more recent out-of-court restructurings by retailers include apparel brand company Cherokee Inc.'s August restructuring of a $49.2 million credit facility with Cerberus Business Finance LLC after losing a licensing agreement with Target Corp. (TGT)

David's Bridal Inc.'s lender in August hired an investment bank to negotiate a restructuring of David's debt.

"It's still probably the case that oil and gas and other energy companies and healthcare will be two of the most active industries seeking out-of-court restructurings," Gilhuly said.

Petrobras parent Petróleo Brasileiro S.A. is restructuring $7 billion of the Brazilian oil and gas company's debt through debt exchanges and issuance of new debt.

Camber Energy is trying to restructure a $40 million defaulted loan with International Bank of Commerce.

Huebner said healthcare industry restructurings have not been as active as expected in the last quarter.

Many restructuring attorneys and advisers predicted after the second quarter that uncertainty about the Affordable Care Act, with Republicans in Congress continuing to push "repeal and replace" bills, might lead to a wave of healthcare out-of court restructurings, which has not yet occurred.

"Healthcare out-of-court restructurings are rolling along more slowly than expected," Huebner said.

"We've definitely had some activity, but not as much as expected," Huebner said. ""The anticipated wave of healthcare restructurings has not really hit. There are many negative ingredients in the mix, but it's hard to say when it becomes a brew that boils over."

Recent healthcare out-of court restructurings include Emerald Medical Applications Inc., which restructuring its debt with a $1.17 million private-investment in public equity offering.

In August, Specialty Care Inc., provider of outsourced clinical services to hospitals, restructured about $340 million

"People are still watching for healthcare out-of court restructurings, but we haven't seen them on the same scale as some other industries," Schweitzer said.

"The Affordable Car Act is never-ending and chaotic," said Giluly. "So, that's going to be around for a while."

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.