The clock ran out a second time last week for Paracelsus Healthcare Corp., which defaulted on a $16.3 million interest payment originally due Feb. 15. The Houston-based company also announced that one of its nonhospital subsidiaries voluntarily filed for bankruptcy protection under Chapter 11.
"Suffice it to say, things are rather tenuous there," said David Peknay, director of corporate ratings at Standard & Poor's. The New York-based credit-rating agency downgraded the company's notes to D, which indicates a default possibility, in February when Paracelsus announced it would miss its first payment deadline.
Last week Moody's Investors Service downgraded the $325 million 10% senior subordinated notes on which the interest payment was due to a Ca rating from a Caa3 rating.
Paracelsus defaulted when a 30-day grace period on the multimillion-dollar interest payment expired March 16. The company is negotiating with the holders of the unsecured senior subordinated notes to work out a solution (Feb. 21, p. 4).
Because the notes are unsecured, the noteholders do not have any claim against Paracelsus' hospital-related subsidiaries or their assets, the company said in a written statement. Each of the company's 10 hospitals has a separate corporate entity, and the hospital operations have been profitable, said Deborah Frankovich, senior vice president and treasurer of Paracelsus.
"The goal is to recapitalize the company," she said. "It is not an operational issue. We've got strong operations, strong hospitals, but we need to get our leverage down."
Paracelsus hopes to obtain $50 million to $60 million of financing through its subsidiary corporations, she said. While it is in negotiations to do so, it is working to extend a $32 million off-balance-sheet receivables financing program, which basically leverages the company's balance sheet for a source of capital. Other than that, the company hopes to use $20 million in cash on hand to fund any working capital and capital expenditure projects.
Peknay said the challenge will be to obtain the financing the company seeks.
"If they have difficulty doing that, then they are in some serious trouble," he said.
PHC Finance, the Paracelsus subsidiary that voluntarily filed for bankruptcy protection last week in the U.S. Bankruptcy Court in Houston, has $4 million in assets and slightly less than $10 million in liabilities, Frankovich said. The subsidiary's principal assets are several medical office buildings. The liabilities were the result of a large personal injury claim and several other claims against the unit, Frankovich said.
Paracelsus has 10 hospitals in seven states. Earlier this month, the company announced it had hired a new chief executive officer to replace interim CEO James VanDevender, who resigned at the end of February (March 13, p. 4). Robert Smith, who comes to Paracelsus from Irving, Texas-based Christus Health, begins his duties March 27.