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With one of the most challenging years in living memory coming to a close, and hindsight being 2020 (pause for groans), we asked the members of our Restructuring Advisory team to reflect on the lessons of COVID-19 and share some insights that this year gave them.


Scott Eisenberg – Partner and Firm Co-Founder

  • We can work remotely very successfully.
  • It helps to have more contact as opposed to less. People feel isolated.
  • What is really important? It became very clear that so many of the activities that were “important” re-pandemic were not missed. Priorities came into focus.

Sheldon Stone – Partner and Practice Leader

As restructuring professionals, if there is one thing that we learned in the COVID era it is that our business is unpredictable.

At the onset of COVID, fellow restructuring professionals, bankruptcy attorneys, and lenders thought we would all be busy come the summer months. Then came PPP, federal subsidies to the unemployed, and banks relaxing covenants. Thus, the forecast changed to “the wave will hit in Q4/Q1.”

Fortunately, Amherst’s Restructuring Practice became somewhat busy in July and very busy in August and this trend continues for us in November. However, in speaking with other professionals, many are not so busy. In fact, some ABL lenders who have had a strong 2020 have seen their business drop off dramatically in October.

So why the inability to predict what the market is doing?

Well, because this is an economy that we’ve never seen before. Some industries, such as food, food delivery, and online retail are flourishing. All of these support consumer demand in COVID. Other industries such as air travel, hotel, and dine-in restaurants are suffering and will continue to do so for the foreseeable future. Interestingly, though, if the data is broken down further, some of these compromised industries are faring well in states that have less restrictions regarding occupancy and mask wearing. So while it isn’t surprising that overall they were impacted by COVID, the degree to which they are affected is still dependent on how well their geographic location is faring against the pandemic.

So, what does this all mean? Really more of the same.

With some senate results still TBD as of this writing, the election will play a big part regarding what will a stimulus package look like if the Democrats end up with more seats in the Senate along with the House of Representatives and the White House. Right now, we know little other that there will likely be some sort of stimulus package for small business. Also, if there is additional federal aid for the unemployed, will this continue to affect the labor shortage that we continue to experience? Will banks amend and extend if the new wave of COVID continues and certain states and or the country go into lockdown again? All these questions and more assure us one thing, inability to predict will stay the norm.


Bruce Goldstein – Managing Director

Thoughts on the lessons I’ve learned during COVID: First and foremost, people can be incredibly adaptable and resilient when adverse conditions occur (I’ve jokingly called it “The MacGyver Effect”).

In business school, one of the fundamental precepts we learned – besides the concept of the “widget” – is the concept of the “rational economic individual.” Having said that, during this COVID environment, we’ve seen numerous examples of behavior that swing between both rational and irrational.

  • We’ve seen people panic buying and hoarding consumable items in seemingly irrational quantities, including toilet paper and flour. They weren’t using more, they were just filling their closets. This is different than the purchases of sanitizing products including hand sanitizer, wipes, Lysol spray, etc.
    • The most commonly available statistic that I found – that was really interesting – is that the average person uses 1 roll of toilet paper per weeek.
  • We’ve seen the outer limits of human sympathy and empathy – people on the health care front lines that risk their lives for those sick and infected individuals that they didn’t know previously and, on the other end, people who feel it’s a violation of their personal rights to be required to wear a mask indoors (and thereby infringe on the rights of others to not possibly be exposed or infected).
    • And we have also seen people who have the inability to isolate themselves for a few days without infecting others, in comparison to Anne Frank and seven others, whose family was able to hide undetected in an attic for 25 months during World War II.
  • We’ve seen companies adopt technology up to 200 times faster than previously imagined and adopt remote work capabilities – previously rejected by numerous companies prior to the lockdown. The rapid embrace of remote work may allow companies to save considerable sums and thrive going forward in ways not previously contemplated.
    • We’ve also seen people who have “gone back to nature” in unprecedented numbers by enjoying the “non technological” pursuits of gardening, baking bread, and other assorted hobbies since they aren’t leaving their homes (not to mention the substantial sums of money deployed to fix up homes, buy new outdoor furniture, increase outdoor living space with decks and other accoutrements including fire pits, outdoor heaters, outdoor TVs, etc.).
  • No different than remote work, we’ve seen people create their own educational “pods” for their kids to be able to continue their educations with groups of like-minded families to allow the children to “be educated” while school is not in its “normal” environment.

At the end of the day, people have shown great amounts of resilience and adaptability to continue doing “what needed to get done.”


James Morden – Managing Director

I’d say the concept is that flexibility is at a premium.

We have seen in the past that clients that are proactive in identifying needs for change in their business and who bring an open-minded approach to managing the business through a downturn have quicker turnarounds and a higher likelihood of long-term success.

That was on display this year like no other, as being able to make sweeping changes on a compressed timeline helped keep certain clients afloat. Moreover, beyond letting go of initial resistance to change and being aggressive in streamlining their business, it also became more crucial than ever for clients to be willing to adjust even their change plans on the fly.

Adaptability = survival.


Brian Phillips – Managing Director

Those dang Millennials were right!

The Millennial generation has embraced technology in ways and with a passion that my generation (Gen-X) and prior generations can’t even imagine. From smart home technology to location tracking apps to video games and conferencing, most Millennials see no limits on what can be done with technology today.

For years, many of them have been questioning the traditional office setting. Standard hours every day and in person meetings, they said, were unnecessary to getting their job done. They said it shouldn’t matter whether they preferred to work from 9-5 or from midnight to 8 a.m.; nor should it matter if they sat at their desk for eight hours a day or if they work from a park bench so long as they get the job done, right?

With the closure in 2020 of so many offices and so many people moving to work from home, the use of connectivity technology (cell phone, video conferencing, email, chat, team collaboration software, text, etc.) has exploded. And you know what? It works!

Yes, there are still some things that need to be done in person and certain industries are impacted more than others, but 2020 has provided a decade of advancement toward remote “everything” in just one year. As is the case with most major changes, I’m sure there will be some amount of bounce back toward traditional office settings when this is all over, but I think it’s clear that many office-setting changes will be permanent improvements over the old way of doing things.


Shareef Simaika – Director

What I learned during COVID so far:

How hard it can be to change and adapt when faced with facts that are difficult to accept. In other words, people have a very difficult time looking ahead and recognizing likely outcomes when that outcome doesn’t “fit” with what they consider to be possible.

Back in March and April, we began hearing from the experts that this wasn’t going to go away and that we probably wouldn’t have a vaccine until year end at the earliest. But the response from governments, businesses, and individuals has been consistently (relatively) short-term in nature, with surprisingly little acknowledgement that things will stay this way for some time.

For example, state and local governments began implementing rules that had very short time horizons, only to extend them repeatedly. This created confusion and frustration when milestone dates were arbitrarily pushed back repeatedly.

Many businesses were paralyzed by the uncertainty and didn’t take steps to make changes, or even develop contingency plans, to adapt to this new reality.

The healthcare industry and governments focused on short-term issues like the lack of ventilators and how to reuse disposable masks, but put little effort into how to address PPE and hospital capacity issues longer-term to avoid those same issues this fall and winter – challenges we are starting to hear about now.

Many schools failed to plan on how to resume in-person learning this fall, assuming that the state/local authorities would tell them what to do or that things would improve on their own.

In all of these examples, many would argue that these challenges were easy to foresee months ago, but this is true only if you accept the paradigm shift that has occurred. COVID shouldn’t be a permanent change; life should return to “normal” at some point, but it is important to recognize that the only thing that is truly “permanent” and reliable is change itself. The sooner we recognize and adapt to it, the more likely we will have a positive outcome.


Erik Morandi – Analyst

Mike Tyson famously said, “everyone has a plan until they get punched in the mouth.” The sudden nature of the pandemic represents a learning curve for all nations and businesses. With the possible exception of Bill Gates, the pandemic is similar to an asteroid hitting the earth as nobody saw it coming.

While the full impact of the pandemic on economies remains unknown, our experience at Amherst Partners has taught us many valuable lessons when it comes to managing distress during an unprecedented event. At the onset of the crisis, we observed the lifeline that government stimulus provided to companies that were distressed pre-pandemic and whose distress only accelerated as a result of the pandemic. The importance of acting fast, being rational and thinking ahead provided companies with resilience to the unknown. Strong communication lines internally and externally, and daily management of performance and reporting of cash are key considerations to a resilient strategy. Moreover, the ability to think outside of the box to develop unique or unorthodox solutions to problems, such as labor shortages, is a strategy that must always be on the table for companies to maintain resiliency during this time and continue to round the corner in their turnaround efforts.

With the US election results still being resolved and the unknown future of pandemic, the biggest lesson that we have learned is to “become comfortable with the uncomfortable.”

Authors
Scott

Scott Eisenberg

Partner & Co-Founder
Sheldon

Sheldon Stone

Partner, Restructuring Practice Leader
Goldstein

Bruce Goldstein

Managing Director, Restructuring Advisory Services
Morden

James Morden

Managing Director, Restructuring Advisory Services
Phillips

Brian Phillips

Managing Director, Restructuring Advisory Services
Simaika

Shareef Simaika

Director, Restructuring Advisory Services
Morandi

Erik Morandi

Analyst, Restructuring Advisory Services

Like many sectors of health care, the dental space has suffered through a traumatic period brought on by COVID-19. We reached out to a number of our contacts in the dental space, including operators of different sizes located in geographies across the United States, in an effort to gather real-world, anecdotal evidence of the impact that COVID-19 has had on operations as well as on deal-making activities.

COVID-19 Impact on Operations – Then and Now

Regardless of the size of the operation or the geography, patient volumes declined precipitously with the onset of COVID-19. In many cases, revenue and patient visits dropped by more than 90%. The vast majority of visits during the early months of COVID-19 were for emergency procedures. A large operator we spoke with closed a majority of its offices and utilized call centers to triage emergency situations to those offices that remained open for business. Hygiene visits, and the follow-up treatments that often result from them, flatlined in many parts of the country.

Fast forward to today and it appears that the volume of visits has largely recovered with several respondents indicating near full recovery, even when adjusting for the effect of burning through the backlog of deferred visits.

Of great concern for most of the DSOs we spoke with are (i) the failure of hygiene visits to fully recover as many patients are still unwilling to risk their overall health for this service, and (ii) the potential impact on business recovery of possible COVID-19 spikes this Fall/Winter. PPP loans combined with aggressive expense management and capital support from financial sponsors allowed most DSOs to managed through the crisis thus far. That said, with many smaller dental practices operating with limited cash resources (30-45 days), any further interruptions to operations could be devastating.
On the HR front, several of the operators we spoke with indicated difficulty in attracting hygienists due to fears around possible infections given their relatively higher risk of exposure. However, some also noted that attracting new associate dentists to their practices has become somewhat easier as many younger dentists are becoming increasingly risk averse in this COVID environment and less likely to “go it alone”.

In terms of bright spots of relative strength, certain practices, including orthodontics and pedodontics, and other specialty areas, such as endodontics, seem to have come through this period without quite the same levels of patient visit volatility.
A few large DSOs, which were relatively highly levered before the onset of COVID-19, found their leverage levels unsustainable in light of the dramatic decline in visits. In the case of Benevis, backed by Littlejohn & Co. and Tailwind Capital, the result was a Chapter 11 filing. In other cases, such as with Elite Dental Partners, backed by Cressey & Co. and Tyree & D’Angelo Partners, restructuring debt at the expense of equity holders may be the key to survival.

M&A Activity

Like most other sectors, M&A activity in the dental space went on hiatus for a few months with most significant deals in the market hitting the pause button from mid-March through June.

Beginning in June, DSO deal activity began picking up again, and the number of DSO deals closed through the first nine months of 2020 (as reported by Capital IQ) is essentially unchanged from the same period in 2019. Of note, prices being paid in terms of multiples remain relatively strong. For good quality assets with scale, multiples are essentially unchanged. However, one of our respondents did indicate that there has been some pull back in pricing for smaller, single-site assets with prices being paid declining by 10-15% to approximately 70% of revenue.

While we did hear mention of increased use of structure (earnouts, other forms of deferred compensation, etc.), this doesn’t appear to be widespread. Rather, the amount of equity roll for the DSO seller is increasing, particularly in instances where the purchase multiple is being pushed up. Higher multiples typically equate to greater equity roll, and, in some cases can be as much as 40%.

To sum up, we believe that the dental sector will continue to be highly attractive for investors as the overall dynamics remain strong, and we don’t see recent events changing anyone’s long-term views. The strong M&A market that we’ve seen over the past several years will likely continue as the dental industry is still largely comprised of smaller players and so remains ripe for continued consolidation.

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Automotive OEMs and suppliers continue to operate in one of the sectors most heavily impacted by the negative effects of the COVID-19 pandemic and resulting recession. With production halted and consumers locked down by stay-at-home orders, the seasonally adjusted annual rate (SAAR) of light vehicle sales in the U.S. bottomed out in April at a 50-year low of 8.7 million units. Since that time, sales have rebounded at a faster rate than most expected, with the August 2020 SAAR rising to just over 15 million units. Sales are expected to level off for the remainder of 2020 before rising again in 2021 to a level anticipated to be somewhere in the mid-15 million range. This compares to unit sales in both 2018 and 2019 of approximately 17 million units, and pre-pandemic expectations of roughly the same level for 2020.

The crystal ball for automakers’ future results has perhaps never been more opaque. Those on the more optimistic side point to the momentum of sales growth in recent months driven by both pent-up demand and a desire for private vehicle ownership given the health-related concerns of ride sharing alternatives. For those with less rosy expectations, concerns center on continued economic headwinds associated with permanent job losses and wage reductions, as well as historically low inventory levels for new vehicles.

Within the industry itself,  trade organization OESA (Original Equipment Suppliers Association) monitors suppliers’ sentiment with its Supplier Barometer Index (SBI), a quarterly survey in which supplier executives indicate their optimism or pessimism for the year ahead. On a 100 point scale, where a score of 50 indicates a neutral sentiment, the index for the second quarter of 2020 dropped 32 points to a score of 15, its lowest level in the history of the survey. For the third quarter, as suppliers resumed production and automotive sales began to rebound, the SBI rose sharply to a somewhat optimistic overall score of 53; however, there were a meaningful number of respondents (30% of the total) whose outlook became even more pessimistic in the quarter.

M&A activity in the automotive sector has slowed in recent months and will continue to be challenging given both economic and industry-specific headwinds. In some cases, the need to address supply chain disruptions and/or enhance competitive positioning within the ACES (Autonomous, Connected, Electrified, Shared) environment will continue to drive M&A activity in spite of challenges standing in the way of getting deals across the finish line. A case in point is Borg Warner’s recent acquisition of Delphi Technologies for roughly $3.2 billion.  A meaningful transaction for bolstering Borg Warner’s capabilities in the arena of electrified propulsion systems, the deal was originally announced in January 2020, placed on hold during the early months of the pandemic shutdowns, and finally completed just last week. With financing sources currently reluctant to fund capital intensive automotive suppliers, we expect to see an increasing volume of divestitures of non-core assets and divisions to generate the funding needed to support ACES investments as well as other capital expenditures. Finally, the current pull-back in automotive sales and related production is certain to produce a meaningful volume of distressed M&A transactions over the next 12 to 18 months. Companies with sufficient financial wherewithal will take advantage of this environment and actively pursue acquisitions of debt-burdened suppliers that further the buyer’s strategic initiatives.

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The law firm Foley & Lardner recently released a compelling survey of nearly 150 manufacturing executives across a variety of industries, including a large number operating in the automotive industry.

The survey focused on supply chains, and in particular, how supply chains are evolving in response to significant disruptions related to both (i) mounting trade tensions in recent years, and (ii) the impact of COVID-19.

As someone that has worked in and around the industrials sector for a number of years, I was struck by the trends aimed at pulling back from decades of supply chain-focused cost reduction initiatives…namely low-cost country sourcing (China in particular) and just-in-time (JIT) inventory management systems. Survey respondents indicated that while costs will continue to be a prominent consideration for purchasing executives, there is a new reality in which the value of supply chain reliability must be weighed against the higher costs that come with it.

Some of the survey’s key findings include…

  • 93% of the executives surveyed indicated they are either implementing or strengthening contingency plans to address future disruptions
  • 43% of respondents with operations in China have either already withdrawn from the country or are in the process of doing so, with another 16% considering it
  • For those companies exiting China, 74% are looking at reshoring some portion of operations to the United States, while 47% are considering Mexico and 24% looking to Canada
  • 70% of respondents expect that, as a result of the pandemic, companies will reduce their focus on sourcing from the lowest-cost supplier
  • Almost two-thirds of respondents believe companies will place less focus on JIT manufacturing models in order to ensure greater operational stability and resilience

Bottom Line

The negative effects of increasingly frequent and severe supply chain disruptions outweigh the cost savings associated with traditional supply chain models that have largely focused on low-cost country sourcing and JIT manufacturing processes. While costs will go up, the value associated with supply chain stability and resilience justifies those increased costs, at least in the near-term. The question remains where those increased costs will be absorbed, with higher prices to consumers likely to be at least a part of the answer.

Author
Don

Don Luciani

Partner, Investment Banking Practice Leader

If you missed our recent webinar, Financing Your Business in the COVID-19 Environment, or would just like to review or share the session, you can access the recording now via the link below.

Original broadcast date:

Wednesday, September 2, 2020, 10 a.m., EDT

About the webinar:

Is your business looking for financing as we rebound from the effects of COVID-19-related shutdowns and restrictions? Hear from our panel of experts on what to expect.

Join us as senior professionals from across the debt and junior capital markets provide an update on both current conditions and future expectations

Moderated by Amherst’s Co-founder Scott Eisenberg, this webinar also features insights from Frank Capella, Founding Partner at Oxer Capital; Steve Davis, Senior Vice President of Middle Market Banking at Comerica Bank; Michael Egan, Partner, Executive Vice President, and Chief Credit Officer at Monroe Capital; and Doug Winget, Executive Vice President, Huntington Business Credit, Huntington Bank.