Retail, health and utilities to feel pain as energy woes fade
The combination of rising rates and a new political regime in the US will bring about an increase in corporate restructurings outside the energy space, creating new opportunities for investors in the riskiest parts of the debt market.
That’s one of the conclusions from interviews with bond traders, bankruptcy lawyers, financial advisers and fixedincome analysts about the outlook for 2017.
Investment options will become more diversified as the primarily energy-driven distressed market of recent years will broaden out, says Tim Coleman, head of restructuring at PJT Partners.
Sectors to watch could include utilities, healthcare providers and more companies in the struggling brick-andmortar retail sector.
“We’re going to see more ordinary restructurings instead of just a lot of commodity-driven activity,” said Coleman, who has worked on major corporate restructurings including Ford Motor and Delta Airlines.
“That’s probably better for the distressed space.”
The dynamic is straightforward: poorly performing companies in struggling or changing industries will have a hard time repaying their debt as borrowing costs rise amid expectations for higher inflation with Donald Trump as president.
RESTRUCTURING POCKETS
Restructurings will happen in certain pockets of pain where the broader economic trends exacerbate existing problems.
This will “weed out very quickly those companies that have borrowed too much”, according to Mike Barnes, cochief investment officer at Tricadia Capital Management, which oversees $2.8bn.
Here’s a look at where experts say those pockets of activity will be.
Retail — what’s going on: Brick-and-mortar retailers are struggling to attract shoppers to their stores as online competitors lure away consumers with free shipping and the convenience of purchasing from their sofas. Macy’s, the largest department-store company in the US, slashed 6,200 jobs and said it would close 100 stores in an effort to slim down. Sears Holdings also announced plans to shutter 150 stores. The troubles will only exacerbate the problems of debt-laden companies such as Gymboree and Claire’s Stores. Where will it happen: One of the most pressing parts of the sector facing immediate turmoil is teen-fashion retailers, according to Jim Mesterharm, head of North American turnaround and restructuring at AlixPartners.
“You certainly have issues in teen fashion that are always going to be there, where styles change and sectors get overpopulated and there has to be a shake-out,” says Mesterharm, who has served as chief restructuring officer at multiple firms including Eastman Kodak. When will it happen: The market can expect to see a flood of retail restructurings early in
the year, says veteran bankruptcy lawyer Ed Weisfelner, a partner at Brown Rudnick who has worked on high-profile lawsuits that include representing Icahn Partners in the Trump Taj Mahal bankruptcy.
Names to watch: J Crew Group, Claire’s, Sears Holdings, Nine West Holdings and Gymboree. Representatives for J Crew and Nine West declined to comment, while spokespeople for the other retailers didn’t respond to messages.
Healthcare — what’s going on: The stocks and bonds of healthcare companies plunged after the US election in November amid expectations that Republicans would use their majority in Congress to significantly change President Barack Obama’s healthcare overhaul from 2010.
Where will it happen: Some areas that could experience the most turmoil include hospitals and pharmaceutical companies, according to Bill Raine, a portfolio manager at Contrarian Capital Management, which oversees $3.9bn.
OBAMACARE FALLOUT
When will it happen: “There are definitely going to be winners and losers out of whatever replacement we see for Obamacare,” says Raine.
“Right now we have very little in healthcare, but we think that over the next couple [of] years there’s probably going to be quite a lot to do.”
Names to watch: Concordia International, Community Health Systems and Valeant Pharmaceuticals International. Representatives for the companies did not respond to requests for comment.
Utilities — what’s going on: “We’re starting to see more in utilities, and those restructurings tend to be big and messy,” says AlixPartners’s Mesterharm.
Where and when will it happen: “As things shake out regarding issues with fossil-fuel consumption and regulation around coal and thermal power plants, we’ll see challenges between the regulated and deregulated sides,” he says.
Names to watch: FirstEnergy, Homer City Generation and TerraForm Power.
FirstEnergy said it was exploring alternatives for its competitive generation business. A Homer City spokesman declined to comment and TerraForm’s representative did not respond to a message.
Commodities — what’s going on: A diversification of opportunities doesn’t mean investing in the distressed commodity space is over. Heftier oil prices could be a bright spot for traders who want to take risks on energy names, says Tricadia’s Barnes.
“There’s now a better clarity and greater expectation of recovery values in oil-distressed sectors,” he says. “Suddenly, where we were passing before in a lot of oil and gas credit opportunities in the distressed set, recently we’ve seen more interesting opportunities.”
Where and when will it happen: “With a quarter of the weakest links right now in the US oil and gas and metals, mining and steel, you’ll continue to see commodities-related companies in the near term drive the default rate in the US,” says Diane Vazza, head of global fixed income at S&P Global Ratings.
Names to watch: Hornbeck Offshore Services, Exco Resources, Vanguard Natural Resources LLC and Pacific Drilling. Representatives for the companies didn’t respond to requests for comment.
ONE OF THE MOST PRESSING PARTS OF THE SECTOR FACING IMMEDIATE TURMOIL IS TEEN-FASHION RETAILERS