Tom, thank you for talking with me. I’ve been doing a lot work on CCRC cases, but it seems like your cases, and in particular I’m thinking about the Amsterdam restructuring, it seems like you get a very positive outcome. And I was wondering, what do you think is necessary for a successful restructuring case?
Thank you for saying that. I think there are a bunch of things that play into continuing care retirement communities (CCRCs), and really any health care company. There really are a few things that I think are unique to health care that make for success. One thing is, you really have to plan in advance, because these cases have to go quickly; they don’t get better with age. You need the confidence of people that if they enter that the organization is going to survive. So, you really have to spend time thinking about what can be done and how to get there very quickly. You have to think ahead.
You also have to think about your highest values in the restructuring. I remember we had a case a few years ago, Erickson Retirement Communities. One of the things that we had to get the board to understand is, you’ve got to figure out your highest priorities in the restructuring and prioritize them. You have to be realistic. So, typically in the cases that I’m working on, the highest priority is making sure that the residents come through unharmed, unimpaired. You know, whether that’s their entrance fee, refunds or their life care contracts. Whatever residents value in the particular circumstance, you have to make that a priority.
Your biography on Sidley Austin’s website emphasizes how creative you are. How do you stay creative when the client is going into crisis mode?
Right. Well, hopefully they get to you early enough that you still can be creative. But one thing that has worked for me personally is that I’m willing to do things that people haven’t done before, if it’s still within the Bankruptcy Code. I remember being in front of a recently retired fantastic judge in the Northern District Texas, saying to him once, when bondholders were complaining about something we did and saying it was unprecedented, and I said, “Well, judge, if people only did things that they’ve done before, we’d still be living in caves.” He liked that, but it’s true. You have to be willing to willing to think about the right business solution for the problem, then try and find a way to make that solution fit within the regulatory and statutory framework that you have to deal with.
Everything you are saying really rings true to what you’d like to see in an ideal health care restructuring, but I want to ask a forward-looking question. I know everyone’s talking about higher interest rates, and that’s just something that I haven’t lived through. Other bankruptcy professionals I’ve talked to, they think restructuring is going to be going off the hook in the next six months with higher interest rates. How do you see that playing out in the health care space?
First of all, everybody is facing a ton of challenges. Everyone. But if you look at health care generally, you’ve got a few forces working there. You have the fact that there were so many private-equity deals done at a higher leverage that are going to be impacted by raising rates and tightening credit mongers, and see you got that. You’ve got a push by the government to limit or even discourage private-equity investment in health care, so that’s going to have an impact. You’re going to be able to see that through the way the Justice Department looks at using the antitrust approvals to regulate. You’ve got that in health care. And you’ve got the fact that a ton of money went in because of COVID, and now that’s dried up. So that’s just health care in general.
Then you look at the stresses on senior living, you’ve got the impact of all these ground leases and all the sale leaseback financings, which have rent escalators that are outpacing reimbursement. And then on the independent-living side, you’ve got other stresses. Now, if the housing market slows down … every time the housing market slows down, the CCRCs get impacted directly. So, with raising interest rates, the housing market is going to slow down. Inflation is going to make the housing market slow down. Slowly tightening credit causes the housing market to slow down. So yeah, I think there are particular concerns throughout this industry. Interest rates are just one more factor that I think is impacting an already difficult industry, especially in the senior-living space.
The last question I have for you is this: Is there a book or article that you think has positively impacted your career or you would recommend that everybody read and get smart on?
That’s a really tough one, and you know, there’s a bunch of different things.… I’m looking for a really profound answer here but I don’t have one.… Okay, I would tell you, there are a couple of things. This is probably going to sound like a silly answer. There’s this book called, “Who Moved My Cheese?” It’s a really thin book; you can read it in an afternoon. It’s not very profound, but it gets you to understand something that’s really important in what we do, which is advising companies that are in distress. Things change in ways that you didn’t plan for, or you didn’t expect. You can’t spend time bemoaning the fact that it changed. It’s not sort of a straight-line path. You’re going to have ups and downs and things that you think are going to be constants or not, and what you have to do is be prepared to deal with that. And then not bemoan the change.
Editor’s Note: This interview has been edited for length and clarity.