Lenders to the battered long-term health-care industry will be watching Vencor Inc. closely over the next few months as the Louisville, Ky.-based nursing home operator tries to sort out its debt woes.
Vencor is expected to unveil a final reorganization plan in the next few weeks.
If the plan is approved by the court, the company could emerge from the protection it sought this week under Chapter 11 of the U.S. Bankruptcy Code.
Vencor's fate is of particular interest to lenders that backed the company with $1.7 billion in syndicated credit lines in 1997.
Though many of those banks have sold off the company's loans at a discount during the past two years, some still hold millions of dollars in loans to about a dozen similarly struggling health-care firms.
In all, 90 loans worth $22 billion were generated in 1998 for the health-care industry, according to Thomson Financial Securities Data. Unlike the known risks of leveraged loans, many of the credits outstanding to troubled health-care companies are investment grade.
Vencor, for instance, was only charged a maximum of the London interbank offered rate plus 68.75 basis points -- less than half the premium charged to companies deemed below investment grade, according to loan documentation.
To say Vencor's reorganization efforts are attracting attention is an understatement. In addition to existing media coverage, a New Jersey company has started a newsletter, Vencor Bankruptcy News, to be published as details emerge in the case.
With 293 nursing homes, "Vencor is the largest long-term health-care provider to have sought protection from creditors and relief from its debts under Chapter 11," said Peter A. Chapman, president of Bankruptcy Creditors' Service Inc. and editor of the newsletter. "Clearly, assuming it succeeds, Vencor's workout will serve as a model for the restructuring of many troubled companies in the health-care industry."
What sets Vencor's apart from other bankruptcies is the company's position as a leader in an industry swamped by overwhelming debt and suddenly rising costs. Companies such as Vencor, Integrated Health Services Inc., and Sun Healthcare Group Inc. were rapidly expanding through mergers when Congress overhauled the Medicare payments system in May 1998.
When the payments dried up, Vencor attempted to cut costs by evicting Medicare patients from its facilities. The result was a public outcry and a public relations disaster.
Caught in the middle were banks and bondholders who suddenly found their investments at risk. To its credit, analysts say, Vencor split up its holdings in early 1998.
Vencor Inc. was spun off as a nursing home operator. Ventas Inc., its sister company, was a real estate investment trust that leased property to Vencor.
Vencor was aware that the payments issue would come up, said Primila Peters, an analyst with KDP Investment Advisors in Vermont. In late 1997 "they issued an earnings warning and decided to split its business. A lot of other players did not even acknowledge change was coming."
Vencor also drew heavily on its $1.7 billion in credit lines syndicated in March 1997 by NationsBank Corp. Other banks, such as J.P. Morgan & Co., Chase Manhattan Corp., PNC Bank Corp., and Bank of New York Corp., stepped forward with commitments between $68 million and $100 million each.
But the split-up did not work. While Ventas performed reasonably well with its real estate holdings, Vencor took a bigger hit than expected. Government projections were that the new Medicare payment system would save taxpayers about $9 billion annually.
A year later, savings have been estimated at closer to $16 billion. For some companies, revenues declined 50%.
"Vencor just didn't know how severe it was going to be," Ms. Peters said.
With earnings slowing, the company defaulted on both its loans and bonds in early 1999. By July, management and creditors were at the table. This week, the company received a court's permission to receive $100 million in debtor-in-possession financing from Morgan Guaranty Trust Co. Ventas agreed to reduce rent for Vencor, and a preliminary reorganization plan was disclosed.
Under the plan, lenders would receive $320 million of the remaining $420 million in loans extended and a 56% equity stake in the company. Bondholders are to receive a 29% equity stake, according to details released by Ventas. For lenders, the plan looks good, according to Ms. Peters. Banks are to receive 76% of the loan's face value -- a premium to the 70% being paid in the secondary market -- and a controlling stake in the company.
Now, said KDP's Ms. Peters, creditors must await the settlement of a suit against the company by the U.S. government. In 1998, Vencor was accused of Medicare fraud.
"People will look at how... these government-related settlements come out," Ms. Peters said. "But the real interest in Vencor is the timeliness -- it's a model."