Healthcare Business News

LifeCare's debt bomb

Sale, restructuring possible as LTAC pressures mount

By Beth Kutscher
Posted: September 22, 2012 - 12:01 am ET

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.”

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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-of-court 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-term-care 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 long-term 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 this year's Healthcare's Hottest)

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 acute-care 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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