Life Care has 45 days to re­solve its debt woes

Sale, re­struc­tur­ing pos­si­ble as LTAC pres­sures mount

Modern Healthcare - - NEWS - Beth Kutscher

LifeCare Hold­ings, Plano, Texas, is fac­ing the pos­si­bil­ity of a sale or re­struc­tur­ing as it races against a 45-day clock to find a so­lu­tion to its high debt lev­els. Credit an­a­lysts have been largely up­beat about the prospects for the acute-care hospi­tal space, but have been more cau­tious about long-term acute-care op­er­a­tors like LifeCare that have sig­nif­i­cant ex­po­sure to Medi­care and carry higher debt loads.

LifeCare last week pro­vided a some­what pos­i­tive up­date to the mar­ket, dis­clos­ing that it had re­ceived loan waivers from its lenders that bought it time un­til Nov. 1 to continue talks with “cred­i­tors, po­ten­tial buy­ers and other in­ter­ested par­ties.”

Stan­dard & Poor’s, though, said it ex­pects “neg­li­gi­ble” prospects for re­cov­ery, and Moody’s In­vestor Ser­vice sim­i­larly said it be­lieves cred­i­tors “would not fully re­cover the face value of their hold­ings based on our es­ti­mate of the com­pany’s value.” Moody’s added that LifeCare’s op­tions in­clude sell­ing the com­pany in whole or in pieces, an out-of­court re­struc­tur­ing, or a Chap­ter 11 fil­ing.

The Car­lyle Group-owned com­pany, which had $456.4 mil­lion in debt as of June 30, failed to make a $5.5 mil­lion in­ter­est pay­ment due Aug. 15 on its se­nior sub­or­di­nated notes.

“We continue to eval­u­ate var­i­ous strate­gic op­tions to re­struc­ture our debt and po­si­tion the com­pany for fu­ture growth,” Chair­man and CEO Phillip Dou­glas said in a news re­lease. The com­pany tapped Roth­schild on May 8 to serve as its fi­nan­cial ad­viser.

Moody’s in Au­gust also down­graded the se­nior se­cured debt of long-term acute-care op­er­a­tor Se­lect Med­i­cal Hold­ings Corp., Me­chan­ics­burg, Pa., cit­ing its “mod­er­ately high lever­age” as well as its ex­po­sure to Medi­care. Al­though Moody’s main­tained its rat­ing on Kin­dred Health­care, Louisville, Ky., af­ter a $200 mil­lion ex­pan­sion of its se­nior se­cured credit fa­cil­i­ties, the agency called its debt load “con­sid­er­able” and sim­i­larly noted its re­liance on Medi­care re­im­burse­ment. Both long-term­care op­er­a­tors are expected to make a sig­nif­i­cant ef­fort to pay down and re­fi­nance debt.

Yet David Pek­nay, an an­a­lyst at Stan­dard & Poor’s, noted that as the only pure-play longterm acute-care op­er­a­tor, LifeCare has “no di­rect peer.”

“The one thing about LTAC is that it has a much higher per­cent­age of its busi­ness gen­er­ated from Medi­care,” Pek­nay said, adding the re­im­burse­ment en­vi­ron­ment has changed “pretty dra­mat­i­cally” for LTACs.

For acute-care hos­pi­tals, credit an­a­lysts ex­pect to see a boost from the Pa­tient Pro­tec­tion and Af­ford­able Care Act, strate­gic ac­qui­si­tions and cost-cut­ting ef­forts that left them with a healthy cash cush­ion.

A num­ber of sys­tems such as Community Health Sys­tems, Franklin, Tenn., and Life­Point Hos­pi­tals, Brent­wood, Tenn., have un­der­taken re­fi­nanc­ing ef­forts to ex­tend the pay­off dead­lines on their debt. Community has con­tin­u­ally bought back shorter-dated debt by is­su­ing notes with lower in­ter­est rates and longer ma­tu­ri­ties. And Life­Point this sum­mer ex­tended the ma­tu­rity on its term loan to 2017 from 2014.

The $3.2 bil­lion in 2012-13 debt ma­tu­ri­ties loom­ing over HCA, Nashville, poses the “only sig­nif­i­cant is­sue,” Fitch Rat­ings noted.

Lever­age—a ra­tio of debt to earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­za­tion, or EBITDA—at for-profit acute-care op­er­a­tors in­creased in the sec­ond quar­ter com­pared with the first quar­ter of the year, but is on par with sec­ond quar­ter 2011, said Frank Mor­gan, an an­a­lyst at RBC Cap­i­tal Mar­kets.

Mor­gan found that lever­age ra­tios at eight of the largest in­vestor-owned chains av­er­aged 4.2 times EBITDA (or 4.2x), with Univer­sal Health Ser­vices, King of Prus­sia, Pa., be­ing the least lever­aged at 2.8x and Ia­sis Health­care, also Franklin, the most at 6.2x. (Ia­sis was named one of Health­care’s Hottest; see story, p. 19.)

LifeCare re­ported a lever­age ra­tio of 5.64x as of June 30.

Debt loads over­all are be­low what they were in 2008, when lever­age ra­tios in the third quar­ter reached an av­er­age of 5.3x at acute­care providers, Mor­gan noted in a re­search note. Dur­ing the past two years, lever­age ra­tios have fluc­tu­ated be­tween 3.8x and 4.6x.

Yet Fitch an­a­lysts noted that sys­tems are un­likely to make sig­nif­i­cant strides to pay down debt, de­spite gains in earn­ings, as the oper­at­ing en­vi­ron­ment re­mains chal­leng­ing.

Fitch also cau­tioned that cash on hand may need to be de­ployed to­ward cap­i­tal ex­pen­di­tures, such as up­grad­ing ac­quired hos­pi­tals or main­te­nance that was pre­vi­ously de­ferred on ex­ist­ing fa­cil­i­ties.

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