Trends in Financial Restructuring

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Trends in Financial Restructuring

Illinois have growing debts and this resulted in delayed Medicaid payments to nursing homes and problems in paying up pension obligations. These poor financial conditions resulted in the bankruptcy of retail companies in Chicago such as Sears and the need for financial restructuring and financial capitalization.

1. US loan defaults would remain historically low.

  • Leveraged Commentary and Data (LCD) surveyed various portfolio managers about their sentiments regarding loan defaults and found that there is a consensus forecast of lower default rates for the US economy as a whole. The loan default rate is expected to be at 1.82% by March 2020, a 30 bps reduction from the previous quarter’s read.
  • 25% of the investors in the December 2018 survey believed that loan default rates would remain historically low until 2020.

2. Chicago and the state of Illinois is having problems paying up pension obligations.

  • The state of Illinois is having difficulty paying up its pension obligations despite massive tax increases.
  • Chicago has $42 billion in debts, with $28 billion caused by unfunded pension liability. It means that 70% of the city's liabilities are in the form of pension underfunding.
  • According to Forbes, Chicago is nearing Detroit's debt levels, which resulted in Detroit declaring bankruptcy.
  • Even private companies such as Sears, an Illinois-based retail chain, declared bankruptcy and will close 142 stores despite enjoying multiple tax breaks.

3. Bankruptcy is a growing problem for seniors.

  • There is also the growing problem of elders declaring bankruptcy which has had a direct effect on nursing homes and retirement homes. By 2050, almost a quarter of Americans will be senior citizens and data suggests that the bankruptcy trend will continue.
  • The rate of people aged 65 and older that are declaring/filing bankruptcy has tripled since 1991. (s2)

4. There is room for growth in restructuring nursing homes in Chicago.

  • Bria Healthcare, which owns nine nursing homes in the Chicago area, were hurt by delayed Medicaid payments. Banks refused to lend them money because the company will not be able to return the money.
  • Restructuring experts told Reuters that Illinois nursing facilities waited up to nine months to receive Medicaid payment.
  • BMO Harris Bank’s Real Estate Finance Group announced a $51 million recapitalization to senior care development in Illinois.
  • Eighty four percent (84%) of voters in Illinois say that quality of care among nursing homes in Illinois should be a top priority.

5. Despite healthy profits and strong performance, large US companies are restructuring.

  • GM announced a restructuring plan that resulted in the layoff of 14,000 employees all over the US despite strong financial performance.
  • This move by GM resulted in increased savings and better agility and flexibility.
  • Ford is also cutting 7,000 white collar jobs despite healthy profits. While restructuring, Ford announced a recapitalization of $1 billion for plant improvements in its Chicago South Side area factories.



Sources
Sources

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  • "LCD’s latest survey of portfolio-manager sentiment, published April 1, continued to point to a low level of immediate concern regarding defaults. Portfolio managers, polled after the Fed’s surprise dovish move on rate and balance-sheet policy, provided a consensus forecast for the U.S. loan default rate at 1.82% for the end of March 2020, a 30 bps reduction from the previous quarter’s 12-month forward read. As for the end of December 2020, the consensus estimate was 2.58%, down from the consensus estimate of 2.79% in the December 2018 survey, indicating slightly more bullish sentiment."
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  • "The rate of people 65 and older filing for bankruptcy is three times what it was in 1991, the study found, and the same group accounts for a far greater share of all filers,” "
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  • "The announcement got a lot of attention, most of it rightly focused on the impact on workers and what it might mean for the broader economy."
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  • "The state of Illinois is already bankrupt. Even with massive tax increases, there is no way the state can meet its pension obligations."
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  • "According to Truth in Accounting, Chicago has debts of $42 billion. That includes pension, bonds, and other liabilities. Of this total, $28 billion is the net unfunded pension liability discounted back at the expected investment return rate, and $800 million, unfunded retiree healthcare. "
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  • "Sears Holdings Corp., which owns Sears and Kmart, has also announced plans to close 142 stores by the end of the year, according to CBS Chicago. This comes on top of 46 closings already scheduled for the year."
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  • "Representatives of Illinois nursing homes say problems with Medicaid payments from managed care organizations have created a revolving door of care for patients as frustrated suppliers continue to walk away after not being paid."
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  • "Over eight in ten (84%) voters in Illinois say that action should be taken in 2019 to increase the quality of care in Illinois nursing homes, according to an AARP survey."
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  • "Ford is cutting about 7,000 white-collar jobs, which would make up 10% of its global workforce."
  • "The company said that the plan will save about $600 million per year by eliminating bureaucracy and increasing the number of workers reporting to each manager."
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  • "The Dearborn, Michigan-based automaker announced on Thursday a $1 billion investment into Chicago's South Side to expand production of the Ford Explorer and Lincoln Aviator. It will also go toward adding about 500 new jobs and protecting about 6,000 existing ones."
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  • "“For an increasing number of older Americans, their golden years are fraught with economic risks . . . Absent significant policy changes that reassume the risks of aging and effectively insure the financial stability of older Americans, our data suggest that the trend of an aging bankruptcy population will continue. "
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  • "Some nursing facilities have waited up to nine months to receive their Medicaid payments, which they rely on to cover everything from salaries, rent and food to laundry and medical equipment and services, restructuring experts have told Reuters."
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  • "The property was acquired during a time of financial distress, and Senior Care Development and Fundamental Advisors were able to stabilize the community through a series of strategic initiatives, according to a press release announcing the $51 million facility."
  • "BMO Harris Bank’s Real Estate Finance Group announced that it closed on a $51 million facility for Arcapita, Senior Care Development, and LCS to finance the recapitalization of Sedgebrook, a continuing care retirement community in Lincolnshire, Ill."
Quotes
  • ""Ford is playing catch-up to GM and Fiat Chrysler in implementing their restructuring plans," David Kudla, chief investment strategist for Mainstay Capital Management, said in an investor note. "We do not believe Ford will have as rosy an outlook as GM for the year.""