Healthcare Distress (Long Divine Intervention)

Literally a week ago in “💥KKR Effectively Tells Bernie Sanders to Pound Sand💥” we wrote:

Remember all of those early year surveys about where the distressed activity was going to be? Yeah, so do we. Everyone was bullish about healthcare distress. And, sure, there have been pockets here and there but nothing that’s been truly mind-blowing in that sector. In other words, wishful thinking. Unless you’re DLA Piper (Orion Healthcare Corp., 4 West Holdings LLC), the (limited) healthcare activity has meant basically f*ck all for you.

The Gods have acted to make us look stupid. Look! Healthcare distress!

Neighbors Legacy Holdings Inc., an operator of 22 freestanding emergency centers throughout the state of Texas filed for bankruptcy on July 12, 2018. The company blames its filing on "financial difficulties caused in large part by increased competition, less favorable insurance payor conditions, declining revenues, and disproportionate overhead costs as compared to their operational income." In other words, its owners did too much too fast, taking on too much debt to expand too rapidly in a space that requires significant upfront capital investment in exchange for a 12-18 month lag in cash flow generation. Initiate death spiral. 

The company's financial numbers look brutal. Per the First Day Declaration:

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Healthcare (Short Predictions. Nobody Effing Knows Part II)

Remember all of those early year surveys about where the distressed activity was going to be? Yeah, so do we. Everyone was bullish about healthcare distress. And, sure, there have been pockets here and there but nothing that’s been truly mind-blowing in that sector. In other words, wishful thinking. Unless you’re DLA Piper LLP, the (limited) healthcare activity has meant basically f*ck all for you.

Fitch Ratings recently released a report indicating that it expects healthcare-related defaults to remain low. Choice bit:

"We don't see any catalyst for there to be a great increase in defaults in the sector," said Megan Neuburger, Fitch's team head for healthcare and an author of the report. "It tends to be a fairly stable sector from a cyclical perspective, so the drivers of bankruptcies tend to be more idiosyncratic."

In other words, the chief drivers of healthcare bankruptcies aren't the same as in other sectors, which are more influenced by economic downturns or factors related to the commodity cycle, she said. Neuburger said her team doesn't see any catalyst on the horizon that would prompt an uptick in healthcare defaults this year or in 2019.

We’ll see if the early 2019 surveys reflect this view.

Q1 2018 Preliminary Review

Long Duopolies = Long Kirkland & Ellis & Weil Gotshal & Manges

As we think about duopolies today, Google ($GOOGL) and Facebook ($FB) come to mind. The two large companies - recent controversies notwithstanding - represent a significant amount of annual ad revenue generation and have increasingly siphoned off market share and revenue from other advertising mediums; in other words, they have dominated the advertising industry. But this isn’t the kind of duopoly that we’re focused on today.

Over last week’s brief holiday respite, we set out to examine restructuring activity in Q1 2018. We wanted to answer this question: who is dominating the restructuring industry? Well, Captain Obvious: Kirkland & Ellis LLP and Weil Gotshal & Manges LLP.

We admit: we’re not surprised by this. We’ve been paying attention. In Q1 2018, Kirkland & Ellis LLP filed EXCO Resources Inc., PES Holdings LLC, Cenveo Inc., iHeartMedia Inc., and the Toys R Us “propco.” Weil Gotshal & Manges LLP filed Fieldwood Energy LLC, Tops Holdings II Corp., Claire’s Stores Inc. and Southeastern Grocers. That’s a meaningful and significant share of the large bankruptcy filings in the quarter. The industry is definitely a two-horse race when it comes to law firms and debtor filings. If we could long these firms, we would.

But, there are some changes afoot. Quintessential creditor-side firms are encroaching on the debtor shops and vice versa. Milbank Tweed Hadley & McCloy LLP filed Remington Outdoor Company and Akin Gump Strauss Hauer & Feld LLP filed Rand Logistics Inc. and FirstEnergy Solutions Corp. In turn, Weil Gotshal & Manges LLP seems to be positioning itself to take a chunk of revenue out of other firm’s debtor-side deals where it can — by sitting in other seats at the table. Weil represents both the potential buyer and the private equity sponsors in iHeartMedia Inc. and the ad hoc first lien group in Cobalt International Energy. Said another way, while Akin and Milbank are no longer creditor-only shops, Weil is no longer a debtor-shop only.

Getting even more granular, Weil Gotshal - along with Evercore Group LLC ($EVR) and FTI Consulting Inc. ($FTI) - have dominated the beleaguered grocery space. After working on the A&P Chapter 22 (which, for all three firms, was a round trip), the trifecta secured both Tops’ and Southeastern’s chapter 11 filings.

Meanwhile, DLA Piper LLP seems to be securing a foothold in the healthcare space. It was involved in Adeptus Health last year and recently filed Orion Healthcare Corp. and 4 West Holdings LLC. This is a firm to watch as people suspect more healthcare flow on the horizon.