COMMERCIAL REAL ESTATE
"Things have improved somewhat in the commercial mortgage-backed securities (CMBS) market in the past year," said Taylor, despite interest rate hikes and regulatory uncertainty. Last summer, delinquency rates of CMBS loans reached their lowest level in the past six years. But there are still plenty of distressed commercial real estate loans out there, CMBS and non-CMBS alike, said Onyx Equities’ Jonathan Schultz. Lenders use the foreclosure process and the receivership process as alternative remedies to limit the costs and the unpredictability that can come with bankruptcy. Challenges to chain of title plague CMBS lenders because there are usually multiple transfers of the underlying loan documents. Borrowers continue to use these chain of title challenges to try to "stave off foreclosure on their assets," said Schultz.
The most significant development in the CMBS market by far, however, is the looming avalanche of maturities coming due in the years ahead. What has seemed to be a calm, steady and efficient structure for commercial real estate may be headed for trouble.
OIL AND GAS
Of course, the oil and gas sector saw a significant depression in pricing. "As we predicted last year, the highly levered industry put pressure on liquidity and on the credit agreements," noted Chadwick. There’s been approximately 20 bankruptcies in the exploration and production (E&P) space over the last 12 months. The pricing pressure continues to be significant. Defaults are increasing, and the credit market is tightening. The second lien market is completely shut off. And we have not seen the worst of the financial INDUSTRY SNAPSHOTS From left: Onyx Equities, LLC's Jonathan Schultz contributes further perspective on trends impacting key industries. 12 DUANE MORRIS - OPTIMIZE performance of E&P companies over the last year. With their borrowing base constricted, they cannot access the high-yield market.
Traditional lenders take a more conservative approach to their exposure to the oil and gas space. Even companies with very good underlying assets produce at a loss, their liquidity drying up. Significant maturities in the bonds are coming due. "They are very ripe for bankruptcy," said Chadwick. "And, ultimately, potentially credit bidding."
MINING AND COAL
Mining companies face reduced demand and a lack of financing. Bankruptcies and credit bidding in coal will continue. Metallurgical coal will not rebound in the near term. "We see continued depression in metallurgical and in thermal coal prices," said Chadwick.
Similar to oil and gas, mining and coal entities have very complicated capital structures. They also have significant legacy liabilities. "You will likely see several more bankruptcies in the near term, including from those companies that are currently attempting to restructure outside of a filing," added Chadwick.
HEALTHCARE
Significant regulatory changes, technological innovations, financial pressures and market dynamics in the healthcare industry are propelling consolidation. Market-dominant players-the big providers-are taking over.
The healthcare industry, which hasn't had an economic restructuring in decades, has suffered some collateral damage as a result of Obamacare, said Chadwick. "When we stepped in as chief restructuring officers for hospitals, we were always very worried about occupancy rates. That’s been flipped on its head. You’re now motivated by the outcome." Providers are rewarded for keeping costs low.
But many providers are not able to leverage themselves to reduce their costs. They do not have the internal systems to bill appropriately. Not only are they now getting paid less for the services they provide, but they are also getting paid less frequently.
Look for considerable integration and consolidation for healthcare service providers over the next several years.