LifeCare Holdings
CASE SUMMARY (Middle Market): LifeCare in ‘Advanced Discussions’ For Potential Sale with Several Potential Stalking Horse Bidders
Tue 05/07/2019 18:35 PM
Relevant Documents:
Voluntary Petition - Hospital Acquisition
Voluntary Petition - LifeCare Holdings
First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
LifeCare Holdings, a Plano, Texas-based operator of long-term acute care hospitals, filed for chapter 11 protection on Monday evening in the Bankruptcy Court for the District of Delaware, along with approximately 25 affiliates, reporting $100 million to $500 million in both assets and liabilities. Through a Houlihan Lokey-run process, the debtors say that they are “currently in advanced discussions regarding a potential sale transaction for some or all of the Debtors’ assets with several potential stalking horse bidders,” which may include the assets of certain non-debtor entities. The debtors say that they anticipate that by July 15, they will have entered into a stalking horse purchase agreement and the court will have entered a bid procedures order. The current company was formed out of a prior bankruptcy through a sale process that closed in June 2013.
The debtors’ sale process would be funded by DIP financing of up to $57.7 million from White Oak Healthcare Finance as DIP agent and lender, including a full rollup of the prepetition revolving facility debt.
The first day hearing has been scheduled for Wednesday, May 8, at 10 a.m. ET.
The debtors have total consolidated long-term debt obligations of approximately $185 million. The company’s prepetition capital structure includes:
According to the first day declaration, in August 2018, LifeCare: (a) refinanced its then-existing revolving facility with a $40 million revolving facility with White Oak Healthcare Finance as agent and (b) entered into a priming term loan credit agreement with Glas Trust Company as agent. Contemporaneously, the debtors also amended their then-existing term loan facility with Seaport Loan Products and Wilmington Trust as co-administrative agents.
“Pursuant to the ABL Intercreditor Agreement,” the declaration adds, “(a) the liens on ABL Priority Collateral (as defined in the ABL Intercreditor Agreement) securing the obligations under the Prepetition Revolving Credit Agreement are senior to the liens on ABL Priority Collateral securing the obligations under the Prepetition Priming Term Loan Credit Agreement and the Prepetition Term Loan Credit Agreement and (b) the liens on Term Facility Priority Collateral (as defined in the ABL Intercreditor Agreement) securing the obligations under the Prepetition Priming Term Loan Credit Agreement and the Prepetition Term Loan Credit Agreement are senior to the liens on the Term Facility Priority Collateral securing the obligations under the Prepetition Revolving Credit Agreement.” Through a term loan intercreditor agreement, the liens securing the prepetition priming term loan agreement are senior to the liens securing the prepetition term loan agreement.
The debtors say that, while they have established “a market leadership position in post-acute care,” internal and external factors led an “unmanageable level of debt service obligations and an untenable liquidity position.” In 2015, Medicare’s establishment of patient criteria to qualify as an long-term acute care-compliant patient facility led to significant reimbursement rate declines over the course of 2015 and 2016 as changes were implemented, the debtors say. Average reimbursement rates for site neutral patients, representing approximately 57% of 2016 cases, are estimated to drop from $23,000 to $9,000 across the portfolio. When rates declined sharply, the debtors explain, LifeCare was unable to adjust. In addition, the number of patients that now qualify by Medicare to have services provided in an LTAC setting has declined substantially, “resulting in a significant oversupply of LTAC beds in the market.” Many healthcare providers that have filed for bankruptcy in recent years have pointed to falling reimbursement rates from the Centers for Medicare & Medicaid Services.
The debtors are represented by Akin Gump and Young Conaway Stargatt & Taylor as counsel, Houlihan Lokey as financial advisor and BRG Capital Advisors as investment banker. Prime Clerk is the claims agent. The jointly administered case is Hospital Acquisition LLC (case number 19-10998). The case has been assigned to Judge Brendan Linehan Shannon.
Background
LifeCare, whose origins date back to a single hospital that opened in 1993, operates long-term care hospitals. The debtors were founded by a clinician who the debtors say “recognized an opportunity to provide patients requiring acute care with better treatment than was available in general acute care hospitals.” The company also operates an approximately 50-bed behavioral health hospital in Pittsburgh, along with three outpatient wound care centers located within three of its Texas-based hospitals. In total, LifeCare operates 17 facilities in nine states with 856 beds. The debtors have 3,500 employees,
The company provides a full range of clinical services to patients with serious and complicated illnesses or injuries requiring extended hospitalization. Patients are admitted to the debtors’ facilities primarily from general acute care hospitals.
Having found itself “capital constrained,” the debtors’ predecessor, LCI Holdings, filed for chapter 11 protection in Delaware on Dec. 11, 2012 (case number 12-13319). According to LifeCare, the effects of Hurricane Katrina coupled with regulations that “substantially” reduced reimbursement rates for services resulted in a significant revenue reduction. “A series of regulations adopted to control health care spending in the LTAC space also frustrated growth efforts,” the debtors add. After running a marketing and sales process prepetition and determining that no bid provided consideration equal to or in excess of their obligations under their prepetition credit agreement, LCI Holdings effectuated a sale of substantially all their assets to the debtors.
The company’s corporate organizational structure follows:
(Click HERE to enlarge)
The debtors’ largest unsecured creditors are listed below:
The case representatives are as follows:
DIP Financing Motion
The debtors request approval for DIP financing in the form of a priming senior secured superpriority revolving credit facility in an amount of up to $57.7 million (including $15 million of incremental liquidity) with White Oak Healthcare Finance as DIP agent and lender. The debtors request $27 million on an interim basis. Subject to entry of the final order, all of the prepetition revolving facility debt would be fully rolled up.
The DIP financing bears interest at the “Base Rate” plus the “Applicable Margin” with 2% added for the default rate, and matures on Nov. 6, 2019. The DIP financing is conditioned on entry of a final order by June 6.
The debtors propose a lien on proceeds of avoidance actions subject to the final order.
The facility includes various fees, including a $150,000 (1% of the interim commitment) DIP facility fee, 0.5% collateral tracking fee, $5,000 administrative fee, unused commitment fee equal to “(i) the average daily Aggregate Revolving Loan Commitment during the preceding calendar month, less the average outstanding principal amount of all Revolving Loans during the preceding calendar month; provided, in no event shall the amount computed pursuant to this clause (a) be less than zero, multiplied by (ii) 0.50% per annum,” and a $150,000 exit fee.
In support of the proposed DIP financing, the debtors filed the declaration of Geoffrey Coutts of Houlihan, saying that the “Prepetition Term Facility Lender Parties ultimately determined that they would consent to the proposed DIP Facility offered by the DIP Lender rather than offering an alternative DIP financing proposal.” The DIP motion states that the “Prepetition Term Facility Lenders are expressly consenting to the granting of the DIP Liens senior in priority to the Prepetition Term Facilities Liens.”
Coutts also clarifies that, on an interim basis, the debtors would be authorized to borrow an amount such that the outstanding balance of the DIP Facility, “after taking into account the repayment of the Existing Debt as authorized under the Interim Order, but without regard to the issued and outstanding letter of credit obligations,” would not exceed $27 million.
Adequate Protection
The company proposes the following adequate protection to the prepetition priming term facility lenders and the prepetition second term facility lenders: replacement liens, allowed superpriority administrative expense claims, financial reporting, payment of professional fees of Ropes & Gray as counsel to the prepetition priming term facility lenders up to $55,000 per month, one local counsel of the prepetition priming term facility lenders up to $10,000 per month, Thompson Hine as counsel to the prepetition priming term facility agent up to $20,0000 per month, Shearman & Sterling as counsel to the prepetition second term facility agent up to $110,000 per month, one local counsel to the prepetition second term facility agent up to $10,000 per month and Stout Risius Ross Advisors as financial advisors to the prepetition second term facility agent up to $30,000 per month.
In addition, subject to the final order, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).
The carveout for professional fees is $350,000.
DIP Budget
The debtors have yet to file a proposed DIP budget.
DIP Milestones
The DIP financing is subject to the following milestones:
The lien challenge deadline is 45 days from formation for an official creditors’ committee (if appointed) or 60 days after entry of the interim order for any other party in interest. The lien investigation budget is $20,000.
Motion to Pay Critical Vendors
The debtors say that they have identified approximately 200 critical vendors, to whom they seek approval to pay up to $1.5 million on an interim basis, with $3 million in total relief sought on a final basis. The critical vendors include physicians and other suppliers of goods and services, including providers of medical supplies, pharmacy, blood suppliers, compressed oxygen and gas suppliers, laboratories, transportation providers, specialty treatments (such as gastrointestinal surgery specialists) and host hospitals that provide hoteling services, hospital food, and cleaning and linen services. The debtors say that they have done business with more than 3,050 vendors during the last 12 months, and the interim and final caps represent less than approximately 7.8% and 15%, respectively, of the debtors’ total trade accounts payable estimated at $19 million.
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition - Hospital Acquisition
Voluntary Petition - LifeCare Holdings
First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
| Summary |
| LifeCare operates long-term acute care hospitals |
| Prepetition process that began in March has led to “advanced discussions” on a potential sale with several potential stalking horse bidders |
| Debtors say that they anticipate entry into stalking horse agreement and an entered bid procedures order by July 15 |
LifeCare Holdings, a Plano, Texas-based operator of long-term acute care hospitals, filed for chapter 11 protection on Monday evening in the Bankruptcy Court for the District of Delaware, along with approximately 25 affiliates, reporting $100 million to $500 million in both assets and liabilities. Through a Houlihan Lokey-run process, the debtors say that they are “currently in advanced discussions regarding a potential sale transaction for some or all of the Debtors’ assets with several potential stalking horse bidders,” which may include the assets of certain non-debtor entities. The debtors say that they anticipate that by July 15, they will have entered into a stalking horse purchase agreement and the court will have entered a bid procedures order. The current company was formed out of a prior bankruptcy through a sale process that closed in June 2013.
The debtors’ sale process would be funded by DIP financing of up to $57.7 million from White Oak Healthcare Finance as DIP agent and lender, including a full rollup of the prepetition revolving facility debt.
The first day hearing has been scheduled for Wednesday, May 8, at 10 a.m. ET.
The debtors have total consolidated long-term debt obligations of approximately $185 million. The company’s prepetition capital structure includes:
- Secured debt:
- Revolving credit agreement: The first day declaration provides that there is approximately $23.9 million owed, while the DIP financing motion provides that $26.7 million in principal is outstanding (plus issued but undrawn letters of credit of approximately $9.4 million).
- Priming term loan agreement: $7.7 million.
- Second term loan agreement: The first day declaration provides that there is $136.8 million is outstanding, while the DIP financing motion provides that $140.9 million is owed.
- Unsecured debt: The list of largest unsecured creditors consists solely of trade creditors (with the largest claim held by Welltower for $1.9 million), except for one unliquidated litigation claim held by Cantu Construction.
- Equity: “Substantially all” of Hospital Acquisition LLC’s common stock is owned by Blue Mountain Capital, Monarch Alternative and Twin Haven. A list of debtor Hospital Acquisition LLC’s equityholders is below:
According to the first day declaration, in August 2018, LifeCare: (a) refinanced its then-existing revolving facility with a $40 million revolving facility with White Oak Healthcare Finance as agent and (b) entered into a priming term loan credit agreement with Glas Trust Company as agent. Contemporaneously, the debtors also amended their then-existing term loan facility with Seaport Loan Products and Wilmington Trust as co-administrative agents.
“Pursuant to the ABL Intercreditor Agreement,” the declaration adds, “(a) the liens on ABL Priority Collateral (as defined in the ABL Intercreditor Agreement) securing the obligations under the Prepetition Revolving Credit Agreement are senior to the liens on ABL Priority Collateral securing the obligations under the Prepetition Priming Term Loan Credit Agreement and the Prepetition Term Loan Credit Agreement and (b) the liens on Term Facility Priority Collateral (as defined in the ABL Intercreditor Agreement) securing the obligations under the Prepetition Priming Term Loan Credit Agreement and the Prepetition Term Loan Credit Agreement are senior to the liens on the Term Facility Priority Collateral securing the obligations under the Prepetition Revolving Credit Agreement.” Through a term loan intercreditor agreement, the liens securing the prepetition priming term loan agreement are senior to the liens securing the prepetition term loan agreement.
The debtors say that, while they have established “a market leadership position in post-acute care,” internal and external factors led an “unmanageable level of debt service obligations and an untenable liquidity position.” In 2015, Medicare’s establishment of patient criteria to qualify as an long-term acute care-compliant patient facility led to significant reimbursement rate declines over the course of 2015 and 2016 as changes were implemented, the debtors say. Average reimbursement rates for site neutral patients, representing approximately 57% of 2016 cases, are estimated to drop from $23,000 to $9,000 across the portfolio. When rates declined sharply, the debtors explain, LifeCare was unable to adjust. In addition, the number of patients that now qualify by Medicare to have services provided in an LTAC setting has declined substantially, “resulting in a significant oversupply of LTAC beds in the market.” Many healthcare providers that have filed for bankruptcy in recent years have pointed to falling reimbursement rates from the Centers for Medicare & Medicaid Services.
The debtors are represented by Akin Gump and Young Conaway Stargatt & Taylor as counsel, Houlihan Lokey as financial advisor and BRG Capital Advisors as investment banker. Prime Clerk is the claims agent. The jointly administered case is Hospital Acquisition LLC (case number 19-10998). The case has been assigned to Judge Brendan Linehan Shannon.
Background
LifeCare, whose origins date back to a single hospital that opened in 1993, operates long-term care hospitals. The debtors were founded by a clinician who the debtors say “recognized an opportunity to provide patients requiring acute care with better treatment than was available in general acute care hospitals.” The company also operates an approximately 50-bed behavioral health hospital in Pittsburgh, along with three outpatient wound care centers located within three of its Texas-based hospitals. In total, LifeCare operates 17 facilities in nine states with 856 beds. The debtors have 3,500 employees,
The company provides a full range of clinical services to patients with serious and complicated illnesses or injuries requiring extended hospitalization. Patients are admitted to the debtors’ facilities primarily from general acute care hospitals.
Having found itself “capital constrained,” the debtors’ predecessor, LCI Holdings, filed for chapter 11 protection in Delaware on Dec. 11, 2012 (case number 12-13319). According to LifeCare, the effects of Hurricane Katrina coupled with regulations that “substantially” reduced reimbursement rates for services resulted in a significant revenue reduction. “A series of regulations adopted to control health care spending in the LTAC space also frustrated growth efforts,” the debtors add. After running a marketing and sales process prepetition and determining that no bid provided consideration equal to or in excess of their obligations under their prepetition credit agreement, LCI Holdings effectuated a sale of substantially all their assets to the debtors.
The company’s corporate organizational structure follows:
(Click HERE to enlarge)
The debtors’ largest unsecured creditors are listed below:
The case representatives are as follows:
DIP Financing Motion
The debtors request approval for DIP financing in the form of a priming senior secured superpriority revolving credit facility in an amount of up to $57.7 million (including $15 million of incremental liquidity) with White Oak Healthcare Finance as DIP agent and lender. The debtors request $27 million on an interim basis. Subject to entry of the final order, all of the prepetition revolving facility debt would be fully rolled up.
The DIP financing bears interest at the “Base Rate” plus the “Applicable Margin” with 2% added for the default rate, and matures on Nov. 6, 2019. The DIP financing is conditioned on entry of a final order by June 6.
The debtors propose a lien on proceeds of avoidance actions subject to the final order.
The facility includes various fees, including a $150,000 (1% of the interim commitment) DIP facility fee, 0.5% collateral tracking fee, $5,000 administrative fee, unused commitment fee equal to “(i) the average daily Aggregate Revolving Loan Commitment during the preceding calendar month, less the average outstanding principal amount of all Revolving Loans during the preceding calendar month; provided, in no event shall the amount computed pursuant to this clause (a) be less than zero, multiplied by (ii) 0.50% per annum,” and a $150,000 exit fee.
In support of the proposed DIP financing, the debtors filed the declaration of Geoffrey Coutts of Houlihan, saying that the “Prepetition Term Facility Lender Parties ultimately determined that they would consent to the proposed DIP Facility offered by the DIP Lender rather than offering an alternative DIP financing proposal.” The DIP motion states that the “Prepetition Term Facility Lenders are expressly consenting to the granting of the DIP Liens senior in priority to the Prepetition Term Facilities Liens.”
Coutts also clarifies that, on an interim basis, the debtors would be authorized to borrow an amount such that the outstanding balance of the DIP Facility, “after taking into account the repayment of the Existing Debt as authorized under the Interim Order, but without regard to the issued and outstanding letter of credit obligations,” would not exceed $27 million.
Adequate Protection
The company proposes the following adequate protection to the prepetition priming term facility lenders and the prepetition second term facility lenders: replacement liens, allowed superpriority administrative expense claims, financial reporting, payment of professional fees of Ropes & Gray as counsel to the prepetition priming term facility lenders up to $55,000 per month, one local counsel of the prepetition priming term facility lenders up to $10,000 per month, Thompson Hine as counsel to the prepetition priming term facility agent up to $20,0000 per month, Shearman & Sterling as counsel to the prepetition second term facility agent up to $110,000 per month, one local counsel to the prepetition second term facility agent up to $10,000 per month and Stout Risius Ross Advisors as financial advisors to the prepetition second term facility agent up to $30,000 per month.
In addition, subject to the final order, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).
The carveout for professional fees is $350,000.
DIP Budget
The debtors have yet to file a proposed DIP budget.
DIP Milestones
The DIP financing is subject to the following milestones:
- Sale agreement: entered into by June 10
- Bid procedures order: entered by July 3
- Sale order: entered by August 16
- Sale consummation: by Sept. 27
The lien challenge deadline is 45 days from formation for an official creditors’ committee (if appointed) or 60 days after entry of the interim order for any other party in interest. The lien investigation budget is $20,000.
Motion to Pay Critical Vendors
The debtors say that they have identified approximately 200 critical vendors, to whom they seek approval to pay up to $1.5 million on an interim basis, with $3 million in total relief sought on a final basis. The critical vendors include physicians and other suppliers of goods and services, including providers of medical supplies, pharmacy, blood suppliers, compressed oxygen and gas suppliers, laboratories, transportation providers, specialty treatments (such as gastrointestinal surgery specialists) and host hospitals that provide hoteling services, hospital food, and cleaning and linen services. The debtors say that they have done business with more than 3,050 vendors during the last 12 months, and the interim and final caps represent less than approximately 7.8% and 15%, respectively, of the debtors’ total trade accounts payable estimated at $19 million.
Other Motions
The debtors also filed various standard first day motions, including the following:
- Motion for Joint Administration
- The cases will be jointly administered under case no. 19-10998 (BLS).
- Motion to Pay Lien Claimants
- LifeCare requests authority to pay up to $400,000 in lien claims.
- Motion to Reject Unexpired Property Leases and Executory Contracts
- The company seeks to reject two unexpired property leases as of May 6, 2019 and May 31, 2019.
- Motion to Pay Employee Wages and Benefits
- The debtors have approximately $5.8 million in employee obligations that will become due within 21 days of the petition date, in addition to $80,000 that will become due in the same period under a severance program. In total, as of the petition date, the debtors have $12.34 million in prepetition employee obligations and $225,000 in obligations owed under the severance plan.
- Motion to Use Cash Management System
- The company has bank accounts with Citizens Bank, PNC Bank, JPMorgan Chase and Capital One.
- Motion to Maintain Insurance Programs
- Motion to Maintain Refund Program
- The debtors estimate that approximately $5.1 million in refunds and credit balances “may” be due and owing under the refund program, of which approximately $2 million “could” become due and owing during the first 21 days of the petition date.
- Motion to Pay Taxes and Fees
- The debtors seek to pay up to $500,000 in taxes and fees on an interim basis and up to $2 million in total relief on final basis.
- Motion to Establish Patient Confidentiality Procedures
- Motion to Provide Utilities with Adequate Assurance
- Application to Appoint Prime Clerk as Claims Agent
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