Two national long-term-care chains skipped interest payments due early this month, prompting increased speculation about their fiscal health.
Moody's Investors Service and Standard & Poor's downgraded credit ratings on Louisville, Ky.-based Vencor and Albuquerque-based Sun Healthcare Group last week to reflect a heightened likelihood of default, analysts from those companies said.
Moody's downgraded senior secured credit facilities for both companies to Caa2 from Caa1. Standard & Poor's downgraded corporate credit ratings for Sun to CC from CCC, and for Vencor to D from CCC. None of the ratings are investment grade.
Vencor failed to pay a $14.8 million interest payment due May 3. The 30-day grace period will expire June 2.
Late last month Sun said it no longer met the minimum financial requirements, including net worth, specified under the borrowing agreements with its senior creditors. While it renegotiates those terms, its banks have waived the financial minimums, providing Sun takes advantage of the grace period ending May 31 to pay $7 million in interest due on subordinated notes. The interest had been due May 1.
"In both cases they need some sort of restructuring. The two companies are basically in the hands of the banks," said Elie Radinsky, an analyst at Standard & Poor's.
Vencor is negotiating loan terms with its banks and rent concessions from its real estate investment trust, analysts said.
Vencor created the REIT, Ventas, in a spinoff last year to help erase about half of its $1.9 billion in long-term debt from its balance sheet. Now, that strategy is backfiring as the struggling Ventas demands timely lease payments.
Vencor operates 300 nursing homes and 60 long-term, acute-care hospitals. It leases 255 of those facilities from Ventas.
Sun, which lost $753.7 million, or $14.49 per share, on $3.1 billion in revenues last year, plans to sell its nine rehabilitation hospitals and 31 assisted-living facilities to raise money. Sun operates 392 nursing homes in 29 states.
"Sun's decline in results has been quicker and more directly related to the impact of (the) PPS," said Michael Murray, a Moody's analyst, referring to Medicare's new prospective payment system for skilled-nursing facilities.
A Sun spokeswoman said the company had sufficient cash on hand to meet its obligations.
Vencor's troubles may have their roots in an aggressive acquisition strategy, which it supported through massive borrowing. Among its 1997 acquisitions were the $616 million purchase of Transitional Hospitals Corp., a Las Vegas-based chain of about 20 long-term, acute-care hospitals, and the $359 million purchase of TheraTx, an Atlanta-based contract therapy services provider.
Last year, Vencor lost $651.5 million, or $9.53 per share, on $3 billion in revenues.
Charles Lynch, a New York-based analyst at Schroder & Co. investment banking, said of Vencor: "The company is restructuring, but you don't know how ugly it's going to be.
"Someone's going to have to take a haircut on this one," he added. Banks, he suggested, might have to extend better terms on their loans, and Ventas will be asked to lower its rents.
Vencor has not made its $18.5 million rent payment to Ventas, due on May 5, but Ventas has agreed not to take any legal action until June 11.
Vencor and Ventas officials did not return phone calls for comment.
Reacting to information that "one, possibly two, large nursing home chains may be facing bankruptcy in the near future," Sen. Chuck Grassley (R-Iowa) two weeks ago introduced a bill he said would help smooth the transition for patients if their nursing homes declare bankruptcy.