May 6 & 7, 2019
Texas-based Hospital Acquisition LLC and dozens of other affiliated companies operating in the acute care hospital, behavioral health and out-patient would care space have filed for bankruptcy in the District of Delaware.* The debtors operate 17 facilities in 9 states for a total of 865 beds; their revenue “derives from the provision of patient services and is received through Medicare and Medicaid reimbursements and payments from private payors.”
Technically, this is a chapter 22. In 2012, the debtors’ predecessor reeled from the effects of Hurricane Katrina and reduced reimbursement rates and filed for bankruptcy. The case ended in a sale of substantially all assets to the debtors.
So, why is the company in bankruptcy again? Well, to begin with, re-read the final sentence of the first paragraph. That’s why. Per the company:
…internal and external factors have lead the Debtors to an unmanageable level of debt service obligations and an untenable liquidity position. In 2015, Medicare’s establishment of patient criteria to qualify as an LTAC-compliant patient facility led to significant reimbursement rate declines over the course of 2015 and 2016 as changes were implemented. Average reimbursement rates for site neutral patients, representing approximately 57% of 2016 cases, is estimated to drop from $23,000 to $9,000 across the portfolio. When rates declined sharply, the Debtors were unable to adjust. Further, the number of patients that now qualify by Medicare to have services provided in an LTAC setting has declined substantially, resulting in a significant oversupply of LTAC beds in the market.
To offset these uncontrollable trends, the company undertook efforts to convert a new business plan focused around, among other things, closing marginally performing hospitals and diversifying the business into post-acute care “to compete in the evolving value-based health care environment.” To help effectuate this plan, the debtors re-financed its then-existing revolver, entered into its $15mm “priming” term loan, and amended and extended its then-existing term loan facility. After this transaction, the company had total consolidated long-term debt obligations totaling approximately $185mm.
So, more debt + revised business plan + evolving macro healthcare environment = ?? A revenue shortfall, it turns out. Which put the debtors in a precarious position vis-a-vis the covenants baked into the debtors’ debt docs. Whoops. Gotta hate when that happens.
The debtors then engaged Houlihan Lokey to explore strategic alternatives and engaged their lenders. At the time of filing, however, the debtors do not have a stalking horse agreement in place; they do hope, however, to have one in place by mid-July.
*There are also certain non-debtor home health owners and operators in the corporate family that are not, at this time, chapter 11 debtors.
Jurisdiction: D. of Delaware (Judge Shannon)
Capital Structure: $23.9mm RCF, $9.4mm LOCs, $15mm “Priming Term Loan” ($7.7mm funded), $136.8mm TL
Legal: Akin Gump Strauss Hauer & Feld LLP (Scott Alberino, Kevin Eide, Sarah Link Schultz) & (local) Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Jaime Luton Chapman, Joseph Mulvihill, Betsy Feldman)
Financial Advisor: Houlihan Lokey Inc. (Geoffrey Coutts)
Investment Banker: BRG Capital Advisors LLC
Claims Agent: Prime Clerk LLP (*click on the link above for free docket access)
Other Parties in Interest:
Equityholders: Monarch Master Funding Ltd., Twin Haven Special Opportunities Fund IV LP, Blue Mountain Credit Alternatives Master Fund LP, Merrill Lynch Pierce Fenner & Smith Inc., Oakstone Ventures Inc.
White Oak Healthcare Finance LLC
Legal: King & Spalding LLP (Arthur Steinberg, Scott Davidson) & (local) The Rosner Law Group LLC (Frederick Rosner, Jason Gibson)
Marathon Asset Management
Legal: Ropes & Gray LLP (Matthew Roose)
Prepetition Term Loan Agents: Seaport Loan Products LLC & Wilmington Trust NA
Legal: Shearman & Sterling LLP (Ned Schodek, Jordan Wishnew) & (local) Potter Anderson & Corroon LLP (Jeremy Ryan, R. Stephen McNeill, D. Ryan Slaugh)
Official Committee of Unsecured Creditors
Legal: Greenberg Traurig LLP (David Cleary, Nancy Peterman, Dennis Meloro) & (local) Bayard PA (Justin Alberto, Erin Fay, Daniel Brogan)