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LifeCare to meet with lenders to start debt revamp

by Jamie Mason | Published July 17, 2012 at 7:04 AM

Loss-afflicted LifeCare Holdings Inc., faced with the upcoming maturity of its senior subordinated notes and the domino effect it could have on the due dates of its other debt, will meet with its lenders on Friday, July 20, as the private equity-backed hospital operator attempts to launch a debt restructuring after the sudden departure of its chief financial officer.

Plano, Texas-based LifeCare, owned by PE firm Carlyle Group, is starting negotiations on its debt because not only does it face the maturity of $119.3 million in 9.25% senior subordinated notes on Aug. 11, 2013, other debt -- a first-lien secured term loan and a revolving credit line -- would come due on May 15 if the sub debt isn't refinanced or purchased before then.

And, in fact, on Monday, a $50 million block of the first-lien debt was sold for 93, according to a source who asked not to be named.

One of the first-lien debt's four largest holders, Monarch Alternative Capital LP, Silver Point Capital LP, BlueMountain Capital Management LLC or Symphony Asset Management LLC, sold the debt to another party, the source said. JPMorgan Chase & Co. was the broker on the deal, the source added.

Officials at Monarch and Symphony couldn't be reached for comment. Silver Point and BlueMountain declined to comment.

There was $316.8 million of its first-lien loan outstanding as of March 31, filings with the Securities and Exchange Commission said, and the weighted average interest rate on it was 13.83%. The first-lien loan matures on Feb. 1, 2016.

Meanwhile, the sub notes are trading at roughly half of their face value. The notes traded at 52.5 on July 10, down from 61.75 on July 6, according to the Trace system of the Financial Industry Regulatory Authority Inc., an independent regulator of securities firms.

Highland Capital Management LP, which has been involved with LifeCare since 2005, has a controlling interest in the sub notes and Symphony Asset Management is also a noteholder, the source said.

Highland Capital refused to comment.

According to the source, LifeCare will likely swap its sub debt for equity and that appears to be what the debt market is expecting.

The sub notes were downgraded to a C rating on June 4 by Moody's Investors Service due to "heightened refinancing risk, an untenable capital structure and interest burden that is not covered by cash flows generated by the company's ongoing operations." Moody's said the outlook was negative.

Washington-based Carlyle has already written down its investment to zero, so it has already taken its loss on it, the source said. Carlyle declined to comment.

The source was unsure if LifeCare would restructure its debt structure outside of bankruptcy court or inside it.

Despite not having heard anything on how the negotiations are going so far, the source did note that LifeCare's restructuring advisors keep saying "they want to have a level playing field."

Meanwhile, while in their early stages, negotiations are occurring in the wake of the surprise July 2 resignation of CFO Chris Walker, who left to pursue other opportunities, the source said.

Luckily for LifeCare, CEO Phillip B. Douglas was formerly its CFO, so the company does have someone with financial expertise to guide them through the restructuring, the source said. Douglas couldn't be reached for comment.

LifeCare must restructure its senior subordinated notes or face the maturity of its first-lien term loan and revolver as well, SEC filings said.

"If our outstanding senior subordinated notes are not refinanced, purchased or defeased in full by May 15, 2013, then the [first-lien senior secured] term loan and the outstanding balance under the revolving credit facility will be due in full on May 15, 2013," LifeCare said in SEC filings.

The company has a $30 million senior secured revolving credit facility that matures on Feb. 1, 2015, but there's no outstanding balance on it.

Carlyle announced plans to buy out LifeCare in July 2005 for $552 million, investing $147 million. Two weeks after the closing, Hurricane Katrina slammed New Orleans, destroying three of LifeCare's facilities that accounted for 12% of its revenue.

For 2011, LifeCare suffered a $34.8 million loss on net patient service revenue of $415.4 million. And for first three months of this year ended March 31, the company had a $4.95 million net loss on $126.4 million in revenue, compared to a $3.6 million net loss for the first three months of 2011, SEC filings said.

LifeCare, which began its operations in 1993, has grown its business through developing and acquiring hospitals. As of March 31, it owned 27 hospitals in 10 states, eight of which are a "hospital within a hospital" -- meaning there is a prolonged-care unit within the larger hospital -- and 19 others are freestanding facilities.

Through its 27 long-term acute care hospitals, LifeCare has 1,390 licensed beds and 4,500 employees.

LifeCare's financial advisor, Neil Augustine at Rothschild, couldn't be reached for comment. LifeCare is also being advised by Skadden, Arps, Slate, Meagher & Flom LLP . Lars Enstrom at Alvarez & Marsal Holdings LLC is advising the first-lien lenders and couldn't be reached for comment.

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Tags: Carlyle Group | debt | hospital | LifeCare Holdings Inc. | private equity

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