The energy sector is just one of many likely to be scrambling for financial and legal aid in the wake of severe disruption from the COVID-19 pandemic, and law firms across the U.S. are bracing for a flurry of new demand for restructuring and bankruptcy expertise.
Most large U.S. coal mining companies already filed for bankruptcy in the last five years, but companies in the space are facing increased pressure and are drawing down revolvers to brace for potential liquidity needs in the face of dire predictions about demand. Oil and gas producers, many of which already carried speculative-grade, distressed debt before the pandemic, started to file for bankruptcy while making significant cuts to capital spending plans. The renewable energy sector and utilities are also likely to be hit by lower demand and liquidity issues.
Law firm Jackson Kelly PLLC expects a peak in corporate restructuring and bankruptcy activities in July or August, managing member Ellen Cappellanti said in an April 9 email. However, the situation with the new virus is changing, and the firm is assessing that prediction daily.
"The general consensus amongst corporate clients is to 'wait and see' through the months of April and May," Cappellanti said. "We predict a flurry at first — businesses that just cannot come up with cash — and then a taper, as options crystallize."
S&P Global Ratings recently predicted that the economic slowdown and the plunge in oil prices would lead to a significant number of BBB-rated companies falling to speculative-grade status in the U.S., Europe, Middle East and Africa. Approximately $640 billion in such long-term debt is vulnerable to that "fallen angel" status, the analysis found.
The volume of U.S. leveraged loans priced below 80 cents on the dollar — a widely accepted level indicating distress — recently exceeded levels seen in the peak of the 2008 financial crisis, according to an analysis by LCD. The nonferrous metals and minerals sector and the oil and gas sector represented 28.7% and 14.9%, respectively, of defaults by par amount for the 12 months ending in March, according to the March 26 analysis.
The pandemic is quickly changing business plans across the board. Pointing to the coronavirus, Murray Energy Corp., the largest coal producer in the U.S., said it was falling short of its bankruptcy cash flow projections and was in danger of running out of liquidity.
"Coronavirus has caused such a massive disruption to business and so dramatically affected cash flow that it actually makes restructuring and bankruptcy much more difficult to even pull off," Bailey & Glasser LLP partner Kevin Barrett said.
For example, Barrett said one of his clients in the coal service business was having cash flow problems going into March and was contemplating a Chapter 11 bankruptcy restructuring to strengthen its finances. When the coronavirus hit, the company's cash flow dropped dramatically, and it is now trying to stay out of bankruptcy as long as possible.
"They really could not afford to get into a Chapter 11 case and then survive once they were there because they just didn't have the cash flow coming in," Barrett said.
Some energy sector companies went into the coronavirus situation with preexisting conditions, said Jim Newell, chair of financial institutions practice at Buchanan Ingersoll & Rooney PC. Disruption in the retail sector and the broader economy will exacerbate those existing issues.
"Some of this is triage for the bankruptcy professionals and the lending world," Newell said. "Which of these companies can we save and preserve jobs?"
In 2008 during the nation's last financial crisis, the oil and gas sector was on the cusp of a shale boom, and coal was still the dominant fuel for power generation. Whiting Petroleum Corp. recently became the first major shale oil and gas producer to file for bankruptcy.
"The whole industry is in a completely different position today," said Sean Moran, chair of Buchanan Ingersoll & Rooney's oil and gas practice group.
Jackson Kelly is already fielding calls from clients experiencing cash flow disruption, Cappellanti said. The firm is busy working with lenders and borrowers on loan modifications, waivers and extensions, she said.
Cappellanti said the current goal is to minimize negative impacts for clients and preserve their businesses. Companies are bracing for an economic fallout by drawing down revolvers and taking other actions to access and preserve liquidity. Cappellanti advised companies to conserve cash as they try to avoid the last resort of bankruptcy.
"We want to help clients review their financing and obligations and figure out how to keep moving forward," Cappellanti said. "This involves renegotiation, setting priorities, and rethinking strategies that may have been in place before the pandemic."
The rapidly evolving situation and its impact on the marketplace will likely change companies' approach to capital allocation and influence risk assessment, Cappellanti said. It may be prudent for companies considering bankruptcy to try to wait out the potential of further stimulus packages before making "such a monumental decision" to file for bankruptcy, according to Nick Johnson, a partner with Bailey & Glasser.
"The issue is that it is really difficult if not impossible to restructure without a clear picture of your cash generation because if there's no cash coming in, there's nothing to restructure," Johnson said.
LCD is an offering of S&P Global Market Intelligence.