For-profit hospital chain Quorum Health Corp. has filed for Chapter 11 bankruptcy, the company announced Tuesday.
Brentwood, Tenn.-based Quorum is seeking court authorization to continue to operate its hospitals during the bankruptcy proceedings. The company, which had hinted it was considering bankruptcy in recent weeks, has also filed motions that would allow it to pay its employee wages and vendors on time. "I think it's a lesson to other hospitals that they should look at their debt structures early on and try to stay away from being overleveraged by private equity," said Eric Snyder, a partner with Wilk Auslander in New York and chairman of its bankruptcy department. "It's just killing these companies."
The private equity firm KKR is the largest holder of Quorum's outstanding debt. The company also owns more than 9% of Quorum's common stock. KKR declined to comment.
Quorum said it entered a restructuring agreement on April 6 with lenders that hold a majority of its outstanding debt. The company said the pre-negotiated Chapter 11 plan will reduce its debt by about $500 million. The agreement includes a $100 million commitment from bondholders in addition to a $200 million equity commitment in exchange for shares in the reorganized company.
Quorum declined to comment beyond the filing. The company said in a news release its 23 hospitals will focus on ensuring employees, physicians and providers can continue to care for patients and communities.
"We believe the financial restructuring plan announced today will strengthen our business and enable our community hospitals to continue the important work they are doing in addressing the COVID-19 crisis, as well as serve their patients and communities," Bob Fish, Quorum's CEO, said in a statement.
Quorum said the "first day" relief anticipated under its bankruptcy plan ensures that vendors and creditors that continue to work with the company will be paid in full as usual.
Fish said Quorum has been transparent over the past year about the need to restructure its debt. He said the restructuring agreement will reduce Quorum's debt and interest expense and better position it for growth.
"We are grateful for the support of our financial stakeholders, which we believe represents a statement of confidence in our business and enables us to move through this process on an expedited basis," he said.
Snyder described the transaction is a typical debt-to-equity swap from which Quorum should emerge relatively quickly. Hospitals typically don't fare well in bankruptcy because the proceedings make suppliers and state governments nervous, as well as patients becoming reluctant to visit the facilities, he said. In Quorum's case, however, the company has an equity commitment, a plan to reduce its debt and lenders are on board.
"I think they'll make a go of it," Snyder said.
Quorum has been losing money since its 2016 spinoff from Franklin, Tenn.-based Community Health Systems, including posting more than $300 million in net losses in 2017 and 2018 combined. The company is down to 23 hospitals, from 38 when it was spun off.
According to the bankruptcy filing, all outstanding shares of Quorum's common and restricted stock will be canceled pursuant to the plan.
"Therefore, if the plan is confirmed by the bankruptcy court, the holders of such equity interests will not receive any recovery," the document says.
Quorum's move flies in the face of a letter from one of its shareholders, Mudrick Capital Management, which asked the company not to enter bankruptcy. David Rosner, a partner with Kasowitz Benson Torres in New York who represents Mudrick, said Quorum's management and shareholders have done exactly what his clients were worried about, which is take company's value for themselves, to the detriment of shareholders.
Kasowitz said his team will become involved in the bankruptcy proceedings in an effort to protect shareholder interests.
"We're going to fight the plan and have the bankruptcy court protect the shareholder value that's not protected by the plan itself," he said.