Another long-term-care company, heavy with debt and reeling from sharply lower Medicare income, has defaulted on its interest payments and initiated talks on debt restructuring with its lenders.
The company, Genesis Health Ventures, is following a pattern that has preceded some high-profile industry financial unravelings.
Vencor, Sun Healthcare Group, Mariner Post-Acute Network and Integrated Health Services filed their voluntary petitions for bankruptcy in recent months. All four national nursing home companies sought protection under Chapter 11 of the bankruptcy code, which allows companies to restructure their debt even as they continue to do business. In each case, the bankruptcy filing came a few months after the company announced it had stopped paying interest on debt and was negotiating with lenders.
Although a bankruptcy filing is not inevitable, Genesis doesn't rule it out.
"We're trying to manage this as proactively as possible," said spokeswoman Lisa Salamon. "We're out there with our financial advisers looking at everything," including bankruptcy, she said.
"It seems to be a predictable pattern already," said Michael Kaplan, a Standard & Poor's healthcare analyst. "First there's the nonpayment of an interest payment and the negotiating with banks, and eventually they are not successful (because) there's not enough cash flow generated by operations to service the debt . . . and that's pretty much the case here."
Last week, Genesis failed to make a $3.8 million interest payment due on a portion of its bank debt. It also said that neither it nor its 44%-owned affiliate, the Multicare Companies, will make interest payments while they negotiate on a new capital structure during the two-month grace period obtained for that purpose. Together the companies have about $2.4 billion in bond and bank debt.
Immediately following the Genesis announcement, Standard & Poor's and Moody's Investors Service lowered ratings on the companies' debt.
Genesis, which with Multicare operates 338 nursing homes in 15 states from its Kennett Square, Pa., headquarters, has shelved the planned sale of its facilities in Illinois, Ohio and Wisconsin. Genesis had letters of intent on all 28 homes, but the buyers weren't able to get financing. Without the $100 million or so it expected from those deals, Genesis couldn't reduce its debt and had to start talking with the banks, Salamon said.
The buyers' inability to access capital didn't surprise Michael Murray, a Moody's analyst.
"The sector is in such turmoil, and there are some fairly significant asset dispositions. I don't know how receptive the market is to those assets because there's a lot of assets in play," he said. About 10% of all nursing homes are operated by companies in bankruptcy. "The question is, who is going to be buying, and whether the debt markets will be there. Even if buyers might find the facilities attractive, the debt markets might not," he said.
Genesis, like other publicly traded nursing home companies, has seen income drop since Medicare instituted a prospective payment system for skilled-nursing facilities in 1997. In response, Genesis sought Medicare patients and boosted both Medicare patient days and overall occupancy. The company recently received a $50 million investment from private investors and reported positive cash flow in its most recent quarter. In April, Medicare will boost rates for several categories of skilled-nursing patients by 20%.
These positive signs not withstanding, observers weren't predicting a quick resolution.
"There's still an awful lot of debt here that needs to be restructured," Murray said.