Gordian Perspectives for January 2020

Each month members of Gordian Group team pick articles, posts or current news events that we found interesting and worth sharing with Gordian clients and our growing network . We provide some commentary and context and where applicable how Gordian Group can help.

12 Trillion Reasons Why Chicken Little Might be Right

The late Herb Stein, Chairman of the Council of Economic Advisors under both Nixon and Ford, once said, “If something can’t go on forever, it won’t.”

That admonition keeps coming to mind these days in connection with the nether regions of the capital markets.  Once again, the doomsayers are sounding dire alarms about the junk bond market. An indicative article, is the following: “Why the Record $1.2 Trillion  Pile of Junk Rated Debt Coming Due is a Worrywhich focuses on the looming maturity cliff in the high yield sector.

This time, the doom and gloom folks may be right.  We are already seeing an uptick in the number of overleveraged companies that recognize they may have intractable debt problems.  Junk spreads over Treasuries have recently bounced off of their lows. We are seeing the tapestry of investor confidence start to unravel – Novel coronavirus fears, the heightened probability of a Sanders presidency, uncertain impacts arising from the impeachment process, and so forth.

We don’t have to have a full-on recession to trigger a problem with the junk bond sector.  The junk market has been buoyed in recent years (and the activity level in the restructuring sector diminished) due to availability of risk capital at low rates in the QE environment.  If investors now are getting increasingly risk-sensitive, these dynamics all may change.

While credit defaults and recessions frequently go hand-in-hand, it does not necessarily have to be that way.  When high yield issuers face a maturity wall (like now), their remedies can include refinancing, sale of assets to repay debt and financial restructuring.  If investors start to shy away from the high yield sector, not only will credit spreads widen further, but refinancing existing obligations may be out of the question for some issuers.  If so, we can expect a much greater volume of defaults and restructurings in the not terribly distant future.

How this plays out is yet to be written.  But it seems to be increasingly likely that the risk-friendly investing environment of the last few years will not go on forever.

Commentary by Gordian Group CEO Henry Owsley

Response to Bloomberg Article on Hospital Bankruptcies

Bloomberg News posted a very interesting article recently that highlighted the challenges faced by traditional hospitals. The piece focused on the financial crisis caused by the inability of some institutions to maintain sufficient in-patient revenues to be viable.  And (with acknowledgement of Sam Maizel of Dentons who was quoted) discussed the dilemmas of developing financial strategies in the face of competing political health care visions in the upcoming election.  Bloomberg’s conclusion was that many hospital bankruptcies and closings are on the horizon.

I wholeheartedly agree with the conclusion that there will be massive hospital retrenchment in this country.  But I believe that the overall trend is inevitable, and largely independent of which political party is in charge in Washington.

We simply have too many acute hospital beds in this country

Some of the “overbedding” is demographic.  As the article points out, many rural hospitals are in trouble because of declining local populations.  Some of these facilities will close, and patients will have to drive further (or be medivacked) to be treated.

But there are troubles aplenty in big cities as well

Some of our biggest – and most costly – health care problems are obesity, diabetes and the like.  The generally preferred approach nowadays is to try to treat these conditions before the patient gets into the hospital setting.  And that means pushing primary medical care out into the community.  That was one of the major principles of Obamacare, and needs to be at the core of any rational health care restructuring in the US.  Dealing with diabetes in its later stages is massively more expensive than tackling it earlier.

Assuming these efforts at improvements in community primary care are at least partially successful (and I believe they should be), then the future need for acute hospital beds to treat that patient population will decline significantly.  I think we are starting to see economics for big city hospitals erode from this direction.

What is the upshot?

Unless the US is prepared to continue to pour enormous sums of money into cash-hemorrhaging inner city hospitals, many will have to close.  Our team was the Chief Restructuring Officer at Brooklyn’s Interfaith Medical Center, and we experienced first-hand the political and other challenges of dealing with community activists and employee unions.  The interim solution for Interfaith was a massive cash injection into New York hospitals, funded by a grant from the Obama administration.  

RELATED: Case Study for Interfaith Medical Center

But What’s Next?

I think that the economic realities will eventually override parochial considerations.  Unfortunately for the local communities and employees, that means a bad economic outcome – the “next best use” for a hospital facility has much less economic value than a healthy hospital and replacement jobs may not pay anywhere near what people were earning previously.

It looks like there will be a lot of hospital closings on the horizon, and it won’t be pretty.

Contact me if you’d like to discuss this further.

Commentary by Gordian Group CEO Henry Owsley