THG Holdings LLC
CASE SUMMARY (Middle Market): True Health Group Seeks Open Auction Sale Process After Medicare Payment Suspensions Cause ‘Severe Liquidity Constraints’
Tue 07/30/2019 18:35 PM
Relevant Documents:
Voluntary Petition
Zucker First Day Declaration
Richards Declaration
Bid Procedures Motion
DIP Financing Motion
THG Holdings, a Frisco, Texas-based laboratory management and diagnostics services provider for the healthcare industry, filed for chapter 11 protection today in the Bankruptcy Court for the District of Delaware, along with affiliates True Health Group and True Health Diagnostics. The debtors request up to $7.8 million in new money DIP financing from certain prepetition first lien lenders, including Monroe Capital and Silver Point entities, to run a 363 sale process for substantially all of their assets. The debtors currently propose an open auction with a sale closing by the end of September but would reserve the right to select a stalking horse bidder through their SSG Advisors-run sale process.
According to the first day declaration of THG CRO Clifford Zucker, senior managing director of FTI Consulting, the chapter 11 filing follows “severe liquidity constraints” caused by a May 2017 decision made by the Centers for Medicare and Medicaid Services, or CMS, to institute, “without notice,” a 100% hold on all Medicare payments to THD, which represent a significant portion of THD’s total cash receipts. The CMS holdbacks, which were reduced from 100% to 35% later in 2017 before returning to 100% as of June 13, 2019, amount to $21 million in receivables since the suspension began. The suspensions came amid claims asserted and concerns raised by CMS and the U.S. Department of Justice, which launched multiple investigations of the debtors’ business. Zucker says that he is informed that the conduct complained of and the claims asserted by CMS and DOJ in support of the most recent suspension are based on facts that date back to 2017 and before.
In response to the June 13 suspension, the debtors sought emergency injunctive relief against CMS in the U.S. District Court for the Eastern District of Texas, which, although initially successful, was denied and the case was dismissed for lack of subject matter jurisdiction. “The continued suspension of all Medicare payments to THD has resulted in irreparable damage to the Debtors’ liquidity and their businesses,” the debtors say, forcing the debtors to commence the bankruptcy cases.
The first day hearing has yet to be scheduled.
“As of the Petition Date,” according to the first day declaration, “the Debtors’ debt obligations totaled over $174 million including long-term debt of $150 million, a revolving line of credit of $2.5 million and an accounts payable balance of approximately $14 million.” The company’s prepetition capital structure includes:
On May 18, through an intercreditor agreement, the prepetition first lien lenders agreed to subordinate $34.1 million to be pari passu with prepetition second lien promissory note. The intercreditor agreement, the debtors say, “was the result of efforts to restructure or sell the Debtors’ business in fall 2017.”
The debtors are represented by Morris, Nichols, Arsht & Tunnell as bankruptcy counsel, Perkins Coie as special counsel and SSG Capital Advisors as investment banker. Epiq is the claims agent. Clifford Zucker of FTI Consulting is the CRO. The case has been assigned to Judge John T. Dorsey (case number 19-11689).
Background
True Health Group, founded in 2014, is one of the largest independent providers of lab management and diagnostic services in the United States, according to the Zucker declaration. The debtors operate full-service clinical laboratories offering, among others, comprehensive testing for biomarkers that can indicate risk for cardiovascular disease, diabetes, autoimmune disorders, cancer and other diseases. In total, True Health offers more than 400 tests and has handled more than 1.5 million patient samples. The debtors have approximately 320 employees and contract with approximately 450 phlebotomist vendors.
Currently, the debtors run about 1,370 samples per day through two facilities - a 109,000 square foot facility in Richmond, Va., that was built in 2013 and a 7,000 square foot facility in Frisco, Texas. The company serves 1,250 physician offices spanning 46 states and Washington, D.C. The debtors say that their advanced testing provides a “far broader and deeper picture of patient health than traditional testing.” True Health also offers an online patient portal that provides interactive reports, live coaching help, patient engagement videos and lifestyle tracking tools.
The debtors also submitted the declaration of CFO Christian Richards in support of the first day relief, disclosing that True Health acquired the assets of Health Diagnostics Laboratories out of their bankruptcy in September 2015. Richards provides additional detail with respect to the suspension of payments, saying that after the holdback was reduced from 100% to 35%, existing stakeholders continued to support the company, “deferring substantial debt service and funding over $35 million in new capital to allow the business to continue to operate and fund True Health’s costs of investigating and responding to the unilateral CMS action.”
Thereafter, Richards continues, the debtors attempted to follow up with CMS but were directed to contact the U.S. DOJ, at which point True Health engaged Mintz Levin and McDermott, Will and Emery as expert legal and regulatory counsel, as well as Navigant Consulting for healthcare advisory services. Ultimately, the company negotiated a comprehensive settlement with the DOJ in December 2018, and with subsequent changes, a final agreement was reached on June 6. However, on June 13, CMS, which the debtors say took a “backseat” during the negotiations, imposed a new 100% suspension of all Medicare payments to True Health. With this second “devastating” suspension, True Health sought injunctive relief, which was denied, leading to the bankruptcy filing.
The debtors’ corporate organizational structure follows:
The case representatives are as follows:
A full list of affiliated debtors seeking joint administration is shown below:
Bid Procedures Motion
The debtors seek approval of procedures for the sale of substantially all of their assets with the option to select a stalking horse purchaser, on the following timeline:
To the extent a stalking horse purchaser is selected, the debtors reserve the right to seek approval of a breakup fee or expense reimbursement.
Initial overbids at auction would be $150,000 above the baseline bid, with subsequent overbids also $150,000.
The debtors request a bid procedures hearing on Aug. 16, with a proposed objection deadline of Aug. 9, at 4 p.m. ET.
DIP Financing Motion
The debtors request DIP financing up to $7.8 million ($3.6 million on an interim basis) from certain prepetition first lien lenders, with Monroe Capital as DIP agent, in the form of a senior secured, superpriority priming delayed draw term loan, pursuant to a July 30 DIP term sheet. The DIP facility includes a post-sale $200,000 winddown budget.
The DIP loan commitments are as follows:
The debtors stress that “virtually all” of their assets are encumbered. The debtors say that the only liens being primed are the prepetition liens of the first and second lien lenders who consent to the priming of their liens. The debtors also propose to grant a lien on the proceeds of avoidance actions subject to the final order.
The DIP financing bears interest at LIBOR + 8.5%, with 2% added for the default rate, and matures on the earliest of (i) 22 days after the petition date if a final DIP order has yet to be entered, (ii) Sept. 28, and (iii) sale consummation, effective date of a plan or other customary events.
The facility includes various fees, including a $100,000 agency fee and 2.5% closing fee.
Subject to the final DIP order, the DIP agent and lenders may propose a chapter 11 plan pursuant to which “claims arising under the Prepetition First Lien Credit Agreement will be reduced to $50 million and satisfied by (i) the creation of a new year secured term loan facility, and (ii) the issuance of new equity interests in the reorganized Debtors to the holders of such claims.”
Adequate Protection
The company proposes the following adequate protection to its prepetition first lien lenders: replacement liens (including proceeds of amounts owed to the company by CMS, and subject to the final order, proceeds of avoidance actions) and payment of professional fees. The prepetition second lien lenders would be entitled to replacement liens.
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 $100,000.
DIP Budget
The proposed budget for the use of the DIP facility is HERE.
DIP Milestones
The DIP financing is subject to the following milestones:
The lien challenge deadline is 60 days from formation for an official creditors’ committee, and for other parties in interest 75 days after entry of the interim DIP order. The UCC lien investigation budget is $35,000.
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
Zucker First Day Declaration
Richards Declaration
Bid Procedures Motion
DIP Financing Motion
| Summary |
| Debtors provide laboratory management and diagnostics services |
| Seek to run a sale process for substantially all assets with an open auction, with the option to select a stalking horse bidder |
| Request $7.8 million in new money DIP financing from certain prepetition first lien lenders |
THG Holdings, a Frisco, Texas-based laboratory management and diagnostics services provider for the healthcare industry, filed for chapter 11 protection today in the Bankruptcy Court for the District of Delaware, along with affiliates True Health Group and True Health Diagnostics. The debtors request up to $7.8 million in new money DIP financing from certain prepetition first lien lenders, including Monroe Capital and Silver Point entities, to run a 363 sale process for substantially all of their assets. The debtors currently propose an open auction with a sale closing by the end of September but would reserve the right to select a stalking horse bidder through their SSG Advisors-run sale process.
According to the first day declaration of THG CRO Clifford Zucker, senior managing director of FTI Consulting, the chapter 11 filing follows “severe liquidity constraints” caused by a May 2017 decision made by the Centers for Medicare and Medicaid Services, or CMS, to institute, “without notice,” a 100% hold on all Medicare payments to THD, which represent a significant portion of THD’s total cash receipts. The CMS holdbacks, which were reduced from 100% to 35% later in 2017 before returning to 100% as of June 13, 2019, amount to $21 million in receivables since the suspension began. The suspensions came amid claims asserted and concerns raised by CMS and the U.S. Department of Justice, which launched multiple investigations of the debtors’ business. Zucker says that he is informed that the conduct complained of and the claims asserted by CMS and DOJ in support of the most recent suspension are based on facts that date back to 2017 and before.
In response to the June 13 suspension, the debtors sought emergency injunctive relief against CMS in the U.S. District Court for the Eastern District of Texas, which, although initially successful, was denied and the case was dismissed for lack of subject matter jurisdiction. “The continued suspension of all Medicare payments to THD has resulted in irreparable damage to the Debtors’ liquidity and their businesses,” the debtors say, forcing the debtors to commence the bankruptcy cases.
The first day hearing has yet to be scheduled.
“As of the Petition Date,” according to the first day declaration, “the Debtors’ debt obligations totaled over $174 million including long-term debt of $150 million, a revolving line of credit of $2.5 million and an accounts payable balance of approximately $14 million.” The company’s prepetition capital structure includes:
- Secured debt:
- Monroe Capital as agent (first lien):
- Revolver: $2.8 million in principal (including $286,745 in PIK interest) and $24,472 in interest
- Term loan: $118.8 million in principal (including $10.6 million in PIK interest) and $1 million in interest
- Riverside Strategic Capital Funds I as agent (second lien): Original principal amount of $18.8 million, with affiliates of prepetition second lien agent funding an additional $15.5 million from May 18 to petition date. The proposed interim order states that “not less than” $60.3 million in principal is owed on the prepetition second lien obligations.
- Monroe Capital as agent (first lien):
- Unsecured debt: $14 million
- Equity: True Health Group LLC’s equity consists of class A shares held by Riverside Strategic Capital Fund I, together with its affiliated funds, Monroe Capital Management Advisors, and two of the debtors’ founding investors and class B shares held by approximately 40 private investors. The full list of equityholders can be found HERE.
The debtors are represented by Morris, Nichols, Arsht & Tunnell as bankruptcy counsel, Perkins Coie as special counsel and SSG Capital Advisors as investment banker. Epiq is the claims agent. Clifford Zucker of FTI Consulting is the CRO. The case has been assigned to Judge John T. Dorsey (case number 19-11689).
Background
True Health Group, founded in 2014, is one of the largest independent providers of lab management and diagnostic services in the United States, according to the Zucker declaration. The debtors operate full-service clinical laboratories offering, among others, comprehensive testing for biomarkers that can indicate risk for cardiovascular disease, diabetes, autoimmune disorders, cancer and other diseases. In total, True Health offers more than 400 tests and has handled more than 1.5 million patient samples. The debtors have approximately 320 employees and contract with approximately 450 phlebotomist vendors.
Currently, the debtors run about 1,370 samples per day through two facilities - a 109,000 square foot facility in Richmond, Va., that was built in 2013 and a 7,000 square foot facility in Frisco, Texas. The company serves 1,250 physician offices spanning 46 states and Washington, D.C. The debtors say that their advanced testing provides a “far broader and deeper picture of patient health than traditional testing.” True Health also offers an online patient portal that provides interactive reports, live coaching help, patient engagement videos and lifestyle tracking tools.
The debtors also submitted the declaration of CFO Christian Richards in support of the first day relief, disclosing that True Health acquired the assets of Health Diagnostics Laboratories out of their bankruptcy in September 2015. Richards provides additional detail with respect to the suspension of payments, saying that after the holdback was reduced from 100% to 35%, existing stakeholders continued to support the company, “deferring substantial debt service and funding over $35 million in new capital to allow the business to continue to operate and fund True Health’s costs of investigating and responding to the unilateral CMS action.”
Thereafter, Richards continues, the debtors attempted to follow up with CMS but were directed to contact the U.S. DOJ, at which point True Health engaged Mintz Levin and McDermott, Will and Emery as expert legal and regulatory counsel, as well as Navigant Consulting for healthcare advisory services. Ultimately, the company negotiated a comprehensive settlement with the DOJ in December 2018, and with subsequent changes, a final agreement was reached on June 6. However, on June 13, CMS, which the debtors say took a “backseat” during the negotiations, imposed a new 100% suspension of all Medicare payments to True Health. With this second “devastating” suspension, True Health sought injunctive relief, which was denied, leading to the bankruptcy filing.
The debtors’ corporate organizational structure follows:
The debtors' largest unsecured creditors are listed below:
| 10 Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Amount |
|---|---|---|---|
| US Department of Health & Human Services / CMS |
Plano, TX | Insurance/ Payor |
Unliquidated |
| US Healthtek Inc. | Haymarket, VA | Lab Supplies | Unliquidated |
| Houlihan Lokey Capital Inc. | Los Angeles | Professional/ Legal Fees |
2,000,367 |
| Roche Diagnostics Corporation |
Charlotte, NC | Lab Supplies | 1,825,262 |
| Perkins Coie LLP | Seattle | Professional/ Legal Fees |
1,286,670 |
| Cigna | Hartford, CT | Legal Settlement |
1,130,952 |
| Diazyme | Pittsburgh | Lab Supplies | 1,115,667 |
| Beckman Coulter | Palentine, IL | Lab Supplies | 799,388 |
| City of Richmond | Richmond, VA | Operating Expenses |
690,291 |
| FedEx | Pittsburgh | Shipping | 543,894 |
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Counsel | Derek C. Abbott | Morris, Nichols, Arsht & Tunnell |
Wilmington, DE |
| Curtis S. Miller | |||
| Daniel B. Butz | |||
| Tamara K. Mann | |||
| Matthew O. Talmo | |||
| Paige Topper | |||
| Debtors' Special Counsel |
N/A | Perkins Coie | N/A |
| Debtors' CRO | Clifford A. Zucker | FTI Consulting | New York |
| Debtors' Investment Banker |
J. Scott Victor | SSG Capital Advisors |
West Conshohocken, PA |
| Teresa Kohl | |||
| Counsel to the DIP Agent and Prepetition 1L Agent |
Charles A. Dale | Proskauer Rose | Boston |
| U.S. Trustee | Jane M. Leamy | Office of the U.S. Trustee |
Wilmington, DE |
A full list of affiliated debtors seeking joint administration is shown below:
Bid Procedures Motion
The debtors seek approval of procedures for the sale of substantially all of their assets with the option to select a stalking horse purchaser, on the following timeline:
To the extent a stalking horse purchaser is selected, the debtors reserve the right to seek approval of a breakup fee or expense reimbursement.
Initial overbids at auction would be $150,000 above the baseline bid, with subsequent overbids also $150,000.
The debtors request a bid procedures hearing on Aug. 16, with a proposed objection deadline of Aug. 9, at 4 p.m. ET.
DIP Financing Motion
The debtors request DIP financing up to $7.8 million ($3.6 million on an interim basis) from certain prepetition first lien lenders, with Monroe Capital as DIP agent, in the form of a senior secured, superpriority priming delayed draw term loan, pursuant to a July 30 DIP term sheet. The DIP facility includes a post-sale $200,000 winddown budget.
The DIP loan commitments are as follows:
The debtors stress that “virtually all” of their assets are encumbered. The debtors say that the only liens being primed are the prepetition liens of the first and second lien lenders who consent to the priming of their liens. The debtors also propose to grant a lien on the proceeds of avoidance actions subject to the final order.
The DIP financing bears interest at LIBOR + 8.5%, with 2% added for the default rate, and matures on the earliest of (i) 22 days after the petition date if a final DIP order has yet to be entered, (ii) Sept. 28, and (iii) sale consummation, effective date of a plan or other customary events.
The facility includes various fees, including a $100,000 agency fee and 2.5% closing fee.
Subject to the final DIP order, the DIP agent and lenders may propose a chapter 11 plan pursuant to which “claims arising under the Prepetition First Lien Credit Agreement will be reduced to $50 million and satisfied by (i) the creation of a new year secured term loan facility, and (ii) the issuance of new equity interests in the reorganized Debtors to the holders of such claims.”
Adequate Protection
The company proposes the following adequate protection to its prepetition first lien lenders: replacement liens (including proceeds of amounts owed to the company by CMS, and subject to the final order, proceeds of avoidance actions) and payment of professional fees. The prepetition second lien lenders would be entitled to replacement liens.
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 $100,000.
DIP Budget
The proposed budget for the use of the DIP facility is HERE.
DIP Milestones
The DIP financing is subject to the following milestones:
- Bid procedures order: entered within 25 days of petition date (Aug. 24)
- Auction: within 55 days of petition date (Sept. 23)
- Sale order: entered within 58 days of petition date (Sept. 26)
- Sale consummation: within 60 days of petition date (Sept. 28)
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. 19-11689.
- Motion to Pay Critical Vendors
- The debtors’ critical vendors include vendors that do not have a contractual relationship with the debtors and are either sole-source providers or cannot be replaced in a cost-efficient manner or without causing irreparable harm. The debtors seek to pay critical vendor claims in an amount not to exceed $250,000 on an interim basis and in an amount not to exceed $500,000 on a final basis.
- Motion to Maintain, Administer, Modify and Renew Refund Programs
- The company requests authority to pay and allow offsets of up to $116,500 in refund program obligations, in the ordinary course of business on an interim basis.
- Motion to Pay Possessory Claimants
- The debtors owe an estimated $600,000 on account of shipping, freight forwarding, consolidating and custom duties claims; however, they are only seeking to transporter claims that they believe are necessary or appropriate to maximize the value of the debtors’ assets, the motion says. To that end, the debtors seek approval to pay up to $30,000 in transporter claims on an interim and up to $50,000 on a final basis. Approximately $300,000 of property is being held by warehousemen, who the debtors estimate they owe $2,564. The warehousemen “may” have a right to assert possessory and other liens on the debtors’ property, the motion says. The company seeks to pay warehousemen claims up to $5,000 on an interim basis and up to $10,000 on a final basis. The debtors also request authority to pay up to $20,000 in potential lien claimant obligations on an interim basis, with $50,000 in total potential lien claimant relief sought on a final basis.
- Motion to Pay Employee Wages and Benefits
- On an interim basis, THG seeks approval to pay up to $815,000 in employee obligations.
- Motion to Use Cash Management System
- The company has bank accounts with Wells Fargo.
- Motion to Maintain Insurance Programs
- Motion to Pay Taxes and Fees
- Though the debtors owe an estimated $690,000 in unpaid property taxes, the company is not seeking the ability to pay the property taxes at this time. The motion seeks approval to pay up to $20,000 in use taxes on an interim basis and up to $50,000 in use taxes on a final basis.
- Motion to Provide Utilities with Adequate Assurance
- Motion to File Consolidated Lists of Creditors
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