Obamacare? Companies Should Care

“The Affordable Care Act is going to be a major factor in hospitality, healthcare and other industries with a large number of hourly employees and no unions,” Shandler said, referring to the federal law commonly known as Obamacare. “I had been looking at it from the point of view of entitlements and reimbursements to healthcare providers. However, in analyzing a company’s employee benefits, before you even address today’s benefits and related expense, you need to consider costs after accounting for the impact of the Obamacare requirements and potential penalties, especially for a company that relies on hourly workers. Unless analyzed timely and properly, these companies may take a big hit to their cash flow, and those that are weaker to begin with may end up in bankruptcy.”

Shandler explained that when given a choice, many modestly-paid hourly employees choose to decline employer-sponsored health benefits due to the employee cost-sharing. If enough workers eschew coverage, their employers may be subject to significant penalties. “So add $250,000 in penalties to the $250,000 in premiums for the company’s sponsored health and welfare plan, and that’s a big hit to a company with $1 million in EBITDA.”

Interest Rates of Paramount Interest

Nobody can say with certainty where interest rates are headed in the short term, but with effective rates near zero, there appear to be only two possibilities— they will stay where they are or start to move higher. If they stay where they are, other factors will drive action—or inaction—in commercial bankruptcies. If rates start to climb, however, “it will have a huge impact,” Shandler said. “Rising interest rates are likely to send companies that are already on the bubble into a tailspin. We seem to be headed toward a better economy, but the flip side of this is that an improving economy will tend to result in higher interest rates.”

Catalanello observed that the U.S. equity markets have been sensitive to even the possibility of higher rates. “Even the hint of higher rates has led to downward spirals—albeit temporary pullbacks, to date— in the stock markets,” he said.

Shandler believes that inflation is artificially low in the United States, based largely on banks’ fear of lending—the fallout from the 2008, Lehman-driven economic collapse “that took banks close to the brink,” he said.

“There should be more inflation, but the money is trapped,” Shandler said. “The banks have [money to lend], but they’re not letting it out because they’re scared to. They’re like every other company in the sense that they want their stock prices to increase. They are keeping higher capital reserves and taking less risk. As a result of all of that, there are fewer loans overall. They’ll lend to a good business with cash flow, but if you’re distressed, there’s no loan.”

“It’s a vicious cycle,” said Catalanello.

Indurstries On The Brink

Dombrowski singled out two industries— shipping and coal—that are likely to see increased bankruptcy activity in the near future.

The combination of staggering growth in the Chinese economy in 2008 and 2009, anticipated growth in the economies of Brazil and India and long lead times for shipbuilders to deliver vessels caused a huge spike in orders for ships. The ships were delivered just in time for the raging overseas economies to cool off and were underused from the beginning. Dombrowski noted that they are difficult, if not impossible, to redeploy; combine that with the issue of older ships’ being fuel-guzzlers, and that spells likely trouble for shipping concerns, he said.

If true, that means a lot of work for bankruptcy attorneys. Heuer, for one, said it won’t be pretty.

“Shipping bankruptcies are a nightmare,” Heuer said. “There are transient assets located everywhere. You need help worldwide to seize control of assets and the overall situation. There’s the issue of where you perfect your interest in the collateral. And consider what maritime assets are subject to: Claims by the crew for wages and personal injury claims are often granted priority status, trumping secured claims. Secured creditors struggle to measure value in the assets. All the while, the boats are laid up if you are unable to protect them, and boats are expensive to lay up.”

Kotler recalled a case in which a debtor filed for protection in Delaware, and its Schenectady office called to complain that agents of the creditors had seized the office’s water cooler. “If you can’t protect a Schenectady water cooler from Delaware, how can you protect ships on each of the seven seas from the United States?” he asked rhetorically. 

A perfect storm of imperfection is plaguing the coal industry—owners of coalfired facilities and companies that supply and service them—and Dombrowski says they are all on his radar screen. Here’s why:

• Coal’s main competitor is natural gas, which is abundant and cheap, especially relative to coal. It is nearly impossible to significantly drive down the price of coal, because the greatest cost associated with coal is the cost of getting it out of the ground. Users of coal that can convert to gas are doing so, leading coal producers to sell at lower rates, compressing the margins.
• Tougher federal clean-air standards make the cost of operating coal-fired facilities more expensive, as (economically unfeasible) retrofitting is the only way to ensure compliance. Although about one-half of the nation’s base-load energy comes from coal, operators of coal-fired facilities will take them off-line, eventually leading to nationwide rolling brownouts.
• The rest of the food chain will suffer, as some short-line railroads that depend heavily on vulnerable coal facilities will feel the pinch.

“It’s a confluence of high prices of coal, low demand, antiquated facilities and retrofitting requirements,” Dombrowski said. “That’s a lot of bad stuff for one industry to sustain.”

Stern V. Marshall: A Dose of SCOTUS Hocus Pocus

ust as bankruptcy players are still sorting out the effects of the 2005 Code changes, so too are they dealing with the fallout of a 2011 Supreme Court case in which the high court tried to define when bankruptcy court judges may issue final orders and when they must issue proposed orders to be reviewed by U.S. district courts. The holding in Stern v. Marshall is fairly “Inside Baseball,” of primary interest to bankruptcy attorneys rather than their creditor, debtor or committee clients. But all of those constituencies are affected by it, if for no other reason than the fact that disputes over which court is entitled to issue a final order have elongated bankruptcy litigation. With that in mind, we offer a brief look at the territorial taffy-pull between bankruptcy courts and district courts, courtesy of the highest court in the land.

The central issue before the Supreme Court was whether a counterclaim in a case was properly considered a “core matter,” Heuer said. In cases where core matters are at issue, bankruptcy courts may issue final orders. In non-core matters, bankruptcy courts may issue proposed findings of fact and law that serve as recommendations, which the district court reviews before it enters a final order. Some bankruptcy cases have been bogged down while the parties litigate what constitutes a core matter, distracting them from litigating the substantive underlying matters. “It’s expensive for debtors and trustees,” Heuer said. Catalanello, meanwhile, speculated that some chapter 11 cases, lawsuits or actions within a chapter 11 case (i.e., adversary proceedings) have not been filed because of Stern-related uncertainty.

In the final analysis, the fallout from Stern is a bit of a tempest in a teapot, according to Kotler: “Bankruptcy judges claim jurisdiction in many cases by saying that Stern should be read narrowly. The district courts don’t necessarily want the cases but want to put bankruptcy courts in their place. Ultimately, this has created a litigation morass that, at the end of the day, is really of no moment because even when a bankruptcy court issues a final order, the district court reviews that just as if it had been a recommendation.”

I'll See You...Out of Court

There may be a shift—albeit slight and hardly seismic—toward resolving insolvency issues outside of the courtroom, with settlements that may include debt-for-equity swaps. Corporate distress that will not sustain the higher costs of in-court litigation, as well as simpler insolvencies, seem to lend themselves better to out-of-court resolution.

Catalanello said: “It’s fashionable now and largely driven by cost considerations, but it works only if a number of conditions prevail.”

Dombrowski pointed out that parties cannot reject contracts out of court, “so it depends on what everyone is trying to accomplish. That being said, if you can do it out of court, it’s preferable. Rational people look to resolve things out of court.” Catalanello countered: “If there’s one litigious and deep-pocketed party among the creditors, there’s likely not going to be an out-of-court resolution, at least without some type of generous settlement in favor of that party. Also, I’ve found that there tend to be loose ends when you operate outside of court. The judicial process results in finality, and most matters get tied up in a neat little ribbon and bow.”