Monday, September 3, 2012

Carlyle Group Sinks LifeCare?

Nearly seven years after purchasing LifeCare Hospitals, The Carlyle Group indicated the hospital company may not be worth saving.  Carlyle's long term ownership may well be toxic:

Pending finalization of a strategy to deal with our debt structure, we have determined that it will be in the Company’s best interest not to pay the next interest payment due on August 15, 2012 under our senior subordinated notes in the amount of $5.5 million. The failure to make this payment will not constitute an event of default under the indenture governing the senior subordinated notes until the expiration of the 30-day payment grace period on September 14, 2012. The failure to make the senior subordinated notes interest payment prior to the end of such grace period would result in an event of default under our senior secured credit facility. The occurrence of an event of default under these agreements could permit the holders to accelerate such indebtedness.

As a consequence of our decision to take advantage of the grace period under the senior subordinated notes indenture, we currently do not meet the conditions to drawing under our revolving credit facility should we have any availability thereunder. Nonetheless, we have a cash balance in excess of $25.0 million as of the date hereof. This amount, together with cash from operating activities, is sufficient to meet our obligations arising in the ordinary course of business, absent an acceleration of our indebtedness due to an event of default as discussed herein.
Carlyle purchased LifeCare on August 11, 2005, just weeks before Hurricane Katrina sideswiped New Orleans.  LifeCare had 25 patients die in their unit within Memorial Medical Center.  Oddly, the hospital with the highest death toll warranted not one mention in the Bush White House Lessons Learned Report, authored by Frances Townsend.  As an administrator who endured in a Southwest Virginia flooded hospital and evacuated a Texas Gulf Coast hospital before a record hurricane, I found the Bush omission disturbing

What could sink LifeCare in September 2012?  It looks like a combination of events.  The first is LifeCare's burgeoning debt load and interest payments. Carlyle loaded LifeCare up with $400 million in debt upon purchase, then grew the debt to $465 million in Q2 2012.

LifeCare was virtually debt free before Carlyle, paying a mere $649,000 in interest expense in pre-PEU 2005 .  LifeCare's interest expense for 2012 is a projected $70 million, given interest expense of $35 million for the first six months.  S&P rated LifeCare a "B" in 2006, lowering it to "D" recently.

Note how Carlyle fails to claim responsibility for putting LifeCare in a precarious position:

Given our current capital structure and operating cash flows, it is unlikely that we will be able to refinance, purchase or defease the senior subordinated notes by May 15, 2013. As a result, our senior secured credit facility and revolving credit facility are reflected as current liabilities as of June 30, 2012. Additionally, an event of default will occur under the indenture governing the senior subordinated notes in the event the senior secured term loan credit facility maturity is accelerated. Accordingly, we have also classified the senior subordinated notes as a current liability as of June 30, 2012. In light of these circumstances, on May 8, 2012, we engaged Rothschild, Inc. as a financial advisor to assist us in evaluating strategic alternatives for our capital structure as it relates to the pending maturity of our senior subordinated notes and the potential accelerated maturity of our senior secured term loan.
Carlyle makes money directly off LifeCare via management fees and refinancing charges.  It can also profit by betting on the company's debt.  Carlyle funds investing in the credit market are not required to publicly disclose their holdings.  How many trade LifeCare's Level 2 debt?

LifeCare's Senior Secured Credit Facility and the Senior Subordinated Notes are traded in private institutional markets. The carrying amounts of the Senior Secured Credit Facility and the Senior Subordinated Notes were $320.5 million and $119.3 million, respectively, at June 30, 2012. Using available quoted market prices, the fair values of the Senior Secured Credit Facility and the Senior Subordinated Notes were approximately $294.8 million and $62.6 million, respectively, at June 30 2012. 
The market considered LifeCare's Subordinated Notes junk, prior to missing the interest payment.  It valued the debt at 52 cents on the dollar.

While Rothschild strong armed creditors, Carlyle continued the big money boy game.  LifeCare spread a quick $100,000 around to its new Chief Operating Officer before missing their interest payment 

Sign On Bonus. LifeCare will pay a $100,000 sign-on bonus on the later of July 1, 2012, or the date that Employee completes ten days of employment under this Agreement. 
Ten days of work for $100,000?  That's the PEU way.  Greed will be the death of healthcare.