Wed 07/15/2020 10:41 AM
Relevant Items:
Covenants Tear Sheet and Debt Document Summaries
Option Care Health’s Debt Documents

The below article includes new analysis of Option Health Care Inc. as well as an issuer covenant card from the Covenants by Reorg team. Request a trial to access the accompanying debt documents

Option Care Health Inc. is an independent provider of home and alternate site infusion services through its national network of 158 locations in 45 states, with about $3 billion of annual revenue. In its latest 10-Q, the company discussed the impact of the Covid-19 pandemic on its business, stating that while it did not “experience a material financial impact” from the pandemic during its first quarter, it has since felt the impact in its labor costs and the cost of procuring sufficient protection equipment. Still, “the Company [has] experienced no material deceleration in cash collections and collaboration with payers continues to be productive.” The company disclosed that the pandemic also may delay the $60 million in net cost synergies it has projected from its August 2019 merger with BioScrip Inc. Continue reading for the Covenants by Reorg team's analysis of the company's debt documents.

In connection with the merger, the company completely refinanced its debt. Option Care Health borrowed $925 million under a term loan facility (the “Term Loan”), issued $400 million of second lien PIK toggle floating rate bonds due 2027 (the “Notes”) and entered into a $150 ABL facility, which was undrawn as of March 31.

The company’s capital structure as of March 31 is as follows:
Covenants by Reorg team's capital structure for Option Health Care Inc. as of March 31, 2020

According to the company’s 10-K, private equity fund Madison Dearborn Partners controls about 81% of the company’s common stock through its interests in the company’s parent company, HC Group Holding I LLC. While the company has yet to draw on its revolver, sponsor-backed companies have been increasingly transferring assets away from lenders as a way to increase liquidity during the Covid-19 pandemic. Given this trend, we examine Option Health Care’s flexibility to enter into similar transactions under its debt documents. On the whole, we find the company’s flexibility to be limited by tight covenants in its debt.
Springing Financial Covenant

The ABL contains a 1x fixed charge coverage ratio covenant that applies when availability is less than the greater of 10% of the Line Cap (the lesser of the borrowing base and total commitments) and $10 million. While this covenant does not currently apply, presumably the company would draw on its revolver prior to entering into any asset-transferring transactions, so this limitation must be considered.
Debt and Lien Capacity

The company’s ability to incur additional debt is currently restricted by its high leverage ratios, which exceed the ratios permitting additional debt in the debt documents. Under the Term Loan, which is the most restrictive piece of the company’s debt, the company could likely incur $248.5 million of additional secured debt (which can be pari with the Term Loan but junior to the ABL), plus an additional $31.5 million of unsecured debt. These amounts are unlikely to solve any significant liquidity issues the company may face in the future. The Notes are only a bit more lenient, permitting $266.9 million of secured debt, plus an additional $39.4 million of unsecured debt.
Transfers to Unrestricted Subsidiaries

The company’s ability to make restricted payments outside of the credit group is also currently limited by its Term Loan and Notes. (The ABL permits unlimited restricted payments when certain Payment Conditions are met, and they currently are; during a liquidity crisis, if such conditions were not met, the analysis of the ABL would be similar to that under the Term Loan.)

Nevertheless, because the Term Loan is drafted like a high-yield bond, the company has additional flexibility to transfer assets to unrestricted subsidiaries, since it can use its general restricted payments basket for additional investments.

Each of the company’s debt documents also include a basket permitting investments in “joint ventures,” which, because it is not a defined term, could arguably include unrestricted subsidiaries that are 99% owned by the company and 1% owned by a different restricted subsidiary.

Under its Term Loan, the company can transfer up to $315.5 million to unrestricted subsidiaries using a combination of baskets; under the Notes, that number is $381.9 million.

--Alisha Turak
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