Saturday, February 4, 2012

Carlyle's LifeCare Settled Katrina Deaths?

The Carlyle Group's LifeCare Hospital of New Orleans lost 25 patients in the hellish aftermath of Hurricane Katrina.  Carlyle, a politically-connected private equity underwriter (PEU), blamed FEMA in its defense of wrongful death lawsuits.

LifeCare's most recent 10-k stated under "forward looking statements:"

The effect of legal actions or other claims associated with the circumstances arising from Hurricane Katrina could subject us to substantial liabilities.

Carlyle vigorously defended the company in Katrina deaths.  These suits require resolution before Carlyle can "liquefy" LifeCare.  Carlyle Group co-founder recently characterized "cashing in" as "liquefying."  That's a disturbing analogy given Katrina's liquid nightmare.

LifeCare imposed a different bad dream on employees, at least those wanting help in saving for retirement.

Retirement Plan. All employees of our company are eligible to participate in our 401(k) plan, and can contribute up to 50% of their base salary (subject to statutory limitations). Prior to 2010, we had the discretion to match up to 33.3% of the first six percent of eligible employee contributions to our 401(k) plan. The matching contributions were made in cash and vested over a three-year period. For the year ended December 31, 2010, matching contributions were suspended.
LifeCare executives had several lifelines not available to employees.  They have severance benefits from six months to two years of pay.  There's much more:

In April 2008, we entered into transaction bonus agreements with certain members of our management. Transaction bonus agreements will provide a one-time bonus opportunity in connection with a change of control transaction.
When Carlyle flips LifeCare, members of the "C Suite" can cash in big.  Transaction bonuses could be as large as 10-15 times the executive's annual salary. 

LifeCare also provides performance based cash incentives and long term equity awards to executives.  As LifeCare did not hit its EBITDA targets in 2010, despite the 401(k) jettison, no cash incentives were awarded.

Carlyle emphasized 2011 targets needed to achieve the prize:

For 2011, the base target incentive opportunity will be equal to 60% of base salary for our Chief Executive Officer, Chief Financial Officer and Executive Vice President of Operations and 35% for our General Counsel, Chief Compliance Officer. No amounts will be paid unless target EBITDA is achieved.

The plan also provides for the payment of incremental performance-based cash incentives to the extent actual EBITDA exceeds target EBITDA. The Chief Executive Officer and Chief Financial Officer are eligible to receive a maximum performance-based cash incentive of 100% of base salary. The incremental performance-based cash incentive is earned on a pro-rata basis for EBITDA in excess of 100% of target up to a maximum of 110% of target.
That measly 2% 401(k) match won't be back anytime soon.  In what other ways did LifeCare squeeze workers in the march toward EBITDA targets?  Seeing employees as "associates" and sharing gains is so last century.

LifeCare changed their Katrina language in recent SEC filings.  It went from:

We are currently defending ourselves against one Hurricane Katrina related lawsuit. We are vigorously defending ourselves in this lawsuit, however, we cannot predict the ultimate resolution of this matters.
All claims raised in connection with Hurricane Katrina have been settled with no significant impact to us, except as follows. We maintained $15.0 million of general and professional liability insurance during this period, subject to a $1.0 million per claim retention. We believed that under our insurance policies, only one retention was applicable to the Hurricane Katrina matters since these matters all arose from a single event, process or condition. However, our insurance carrier sent reservation of rights letters which challenged, among other things, the application of one retention to the Hurricane Katrina related matters. On June 5, 2009, we reached an agreement with the insurance carrier regarding the reservation of rights matters whereby they would continue to pay all costs, indemnification and related expenses for the Hurricane Katrina claims in consideration for an additional $1.0 million, which was paid by us in three equal installments, on July 1, 2009, March 31, 2010, and March 31, 2011.  
Private equity underwriters (PEU's) speak so obtusely..Tenet Health publicly settled its Katrina lawsuits for $25 million.  The article mentions LifeCare paid "more than $200,000" to the son of a deceased patient.

Some relatives of patients who died at Memorial have opted out of the class-action suit and pursued separate claims against Tenet and other defendants.
LifeCare was clear as a New Orleans cesspool on remaining wrongful death lawsuits. 

On life support was LifeCare's debt, characterized as Level 2 and "trading" at 75 cents, 72 cents and 98.5 cents on the dollar in late 2010.   How junky is LifeCare's debt?  It's most recent 10-q stated:

The weighted average interest rate applicable to the $309.8 million outstanding under our term loan facility was 13.50%.
That's serious crap. Carlyle is happy to pay interest, but hates paying taxes and standard employee benefits.

LifeCare has $120 million in debt due August 2013.

We and our subsidiaries, affiliates or significant stockholders may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Will Carlyle cram itself down in 2013?

The Carlyle Group purchased Brintons' distressed debt, then used it as a Trojan horse to takeover the company. In securing Brintons, a British carpet maker, Carlyle dumped the employee pension fund.

It's the PEU billenium, where Carlyle is the savior for pension funds, while its affiliates abandon retirement benefits.  Workers may have to die on the job.

Update:  The Katrina wrap-up bow is almost complete.  President George W. Bush has been rehabilitated, "white washer" Homeland Security Adviser Frances Townsend delivered a brushback pitch and FEMA remained a whipping post for trying to collect mis-paid funds