Friday, October 28, 2016

NCBJ Report 2016: Hot Spots in a Cold Restructuring World: Energy and Healthcare Restructuring

This panel examined energy and healthcare reorganizations.   The unifying theme of this panel was that industries that are highly regulated, highly leveraged and lack control over their prices are prime candidates for bankruptcy.   According to the moderator, Judge Margaret Mann, the panel hoped to make its presentation relevant to practitioners regardless of whether their typical client was a gas station or dentist as opposed to a major oil producer.   Judge Mann said that these two areas are "vital to the economy and heavily regulated."

Bill Wallander explained that the energy industry was in a mess because oilprices dropped from $110 per barrel to $26, although they have recovered to $50.   He said that companies had made their plans based on being able to survive at $70-80 a barrel but that prices kept dropping.  He did add that companies that hedged were able to hold on later but that many did not have sufficient hedges.  Ana Alfanso stated that banks didn't see the drop coming either.   She stated that the crisis highlighted the problem with asset based lending.   She added that cash was a major issue because companies without cash could not drill.

Harris Winsberg said that nonprofit healthcare providers suffer from having a poorer client base  and competition from for profits leading to doctor flight.  He added that cash was a big problem.  He said that ideally a hospital system should have 365 days of cash on hand but that he was seeing clients with just 3-5 days of cash on hand.   This cash shortage can become critical because the government can decide that a provider has been overpaid and recoup against future income.

Thomas Califano stated that community hospitals have had difficulties with the drastic changes brought about by the Affordable Care as well as difficulty keeping up with changes in technology.

Ms. Alfanso talked about issues with hedges in energy cases.   If a company is in the money, its lenders may want to exercise the hedges to pay down debt but if the hedges are terminated, the company can't use them for cash management.

Mr. Wallander spoke about the problem of valuation in the energy industry.  This will affect which creditor holds the fulcrum security, that is, which secured claim is at the dividing line between being secured and unsecured.  Ms. Alfanso said that it may help to put valuation off when prices are changing.   She said that "if you wait long enough, the market can tell you where the fulcrum is." However, the Sabine case illustrated the downside of this approach because the adequate protection claims consumed all of the unencumbered assets.

Bill Wallander stated that the end game in energy was to survive the volatility.    He said, "It is easy to get into chapter 11 but  harder to get out."   He added that  "if you don't get out you are pouring concrete down a hole instead of producing."

Mr. Winsberg said that there is no typical health care case.   This was echoed by Mr. Califano who pointed out that healthcare cases bring a range of constituents not present in other cases, including patients, doctors, families, regulators and the public.     He pointed out that in healthcare "it's people's lives" that are at stake.   Califano added that non-creditor, non-economic interests played a role and that a nonprofit healthcare business had to consider the mission of the entity as opposed to just selling for the best price.

The panel also offered a few pitfalls involving energy and healthcare cases.   In the energy field, plugging and abandoning wells can be an extremely expensive task fraught with environmental risk.  An interesting point is that if the bankruptcy estate cannot afford the plugging liability, the regulators can look to co-owners and previous owners.   In healthcare, the government has argued that the provider agreement is an executory contract which must be assumed in a sale so that the purchaser must take the assets subject to the overpayment liability.    Another percolating issue is whether bankruptcy courts have jurisdiction to decide medicare issues if the debtor has not exhausted its administrative remedies.

Bill Wallander suggested that the flood of energy cases may slow down.  He said,   "The fire will burn as long as it has fuel.  We have processed a lot of companies through the bankruptcy process.   Plenty of companies can make money at $50."  He also said that improvements in technology will also reduce filings, that a better "special sauce" will allow them to drill better.   

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