Kaye Scholer Partner Provides Bankruptcy, Distressed Outlook
Madlyn Primoff, a partner in Kaye Scholer’s Bankruptcy & Restructuring Practice released her outlook on bankruptcy risks facing various industries in the U.S. for the second half of 2012. Madlyn Primoff’s predictions are based on economic and financial trends that could benefit some companies in distress, but hurt others that are in already-exposed industries.
“Corporate bankruptcy filings have steadily declined over the last couple of years. This is primarily being driven by the extended low interest rate environment, which is allowing many over-leveraged companies to refinance and delay a bankruptcy filing – at least in the short-term,” commented Primoff. “Looking forward, if interest rates rise, this will increase pressure on companies that are barely breaking even. In addition, new capital requirements in Europe may force many European institutions to sell off loans in their portfolios to buyers of distressed debt that may be more interested in precipitating a restructuring, rather than prolonging the inevitable and extending the maturity date of a loan.”
Madlyn Primoff expects three industries to be at heightened risk for bankruptcy in the second half of 2012 and into 2013: infrastructure, shipping and ports.
A significant trend that we have seen is the privatization of infrastructure assets, including toll roads, bridges and tunnels. These public-private partnerships began as a solution to America’s infrastructure spending deficit, but many recent failures suggest that the private sector also faces many challenges in managing infrastructure assets. In the case of tolls roads, the number one issue has been the imprecise nature of traffic projections. With high gas prices and Americans still suffering from the recession, many drivers prefer to sit in traffic on non-toll roads, bridges or tunnels, rather than pay the cost of an extra toll. In addition, the volume of commercial truck traffic is directly tied to the welfare of a state’s economy, and when trucks do not maintain the same volume of shipments and goods, it can negatively impact investors.
The shipping industry has been absorbing a surplus of newly built ships commissioned during the pre-recession boom years. This, coupled with the fact that the economic downturn has forced companies to scale back on production and spending, has resulted in a collapse in freight rates. For example, several large shipping companies – including Marco Polo, Omega Navigation, General Maritime, and TBS Shipping – have recently sought protection under Chapter 11.
On top of these vulnerabilities, the shipping industry is preparing itself for the expansion of the Panama Canal, which is expected to be completed in August 2014. This Panama Canal project will allow materially larger vessels, with much greater capacity to transport cargo, to travel through the Canal from Asia to the Atlantic Coast of North America. In anticipation of the completion of the Panama Canal project, significant numbers of new and larger vessels are under construction. The use of these vessels is expected to put additional pressure on existing shipping companies and their fleets, which may have to compete with larger ships. Ship operators, ports, and other transport companies will have to evolve in order to meet the changing landscape precipitated by the Panama Canal project.
The expansion of the Panama Canal and the construction of these larger vessels will have a profound impact on U.S. ports. Many East Coast ports are presently not large enough or deep enough to accommodate the new, larger vessels that will travel through the Canal. These ports risk a substantial loss of traffic as they may be by-passed in favor of larger ports that can accommodate the new, larger vessels. Although expansion projects are under way at a number of East Coast ports, many of these projects are not expected to be completed until 2016, at the earliest. If certain ports cannot expand fast enough, or if the ports are by-passed in favor of other locations, these ports may suffer a material loss in revenue, and require a restructuring of their indebtedness.