June 24, 2019 − Joerns WoundCo Holdings, Inc. and 12 affiliated Debtors (trading as Joerns Healthcare, “WoundCo” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11401. WoundCo, a manufacturer and distributor of medical equipment, is represented by Jeffrey M. Schlerf of Fox Rothschild LLP. Further board-authorized engagements include (i) White & Case LLP as restructuring counsel, (ii) Moelis & Company as investment banker and financial advisor, (iii) Conway Mackenzie, Inc. as restructuring advisor and (iv) and Epiq Corporate Restructuring as claims agent.
The Company’s petition notes between 1,000 and 5,000 creditors; estimated assets between $100mn and $500mn; and estimated liabilities between $100mn and $500mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) USI Midatlantic Inc. ($617k trade payable), (ii) Linak US Inc. ($417k trade payable) and (iii) KCI USA ($371k trade payable).
The Prepackaged Plan and Restructuring Support Agreement
On June 21, 2019, the Debtors, certain of the Debtors’ first lien lenders and certain of the Debtors’ second lien lenders entered into a restructuring support agreement (the “RSA”) and executed a restructuring term sheet. The RSA contemplates a financial restructuring transaction (the “Restructuring Transaction”) to de-lever the Company’s balance sheet through the implementation of a prepackaged plan of reorganization (the “PrepackagedPlan”). The Prepackaged Plan, which reflects the terms of the RSA, provides for, among other things:
- the First Lien Lenders to receive 95% of newly issued common equity interests (the “New Common Stock”) in the reorganized Debtors (the “Reorganized Debtors”) (subject to dilution by the Backstop Fee (as defined below) and a management equity incentive plan) in exchange for their claims;
- the Second Lien Lenders to receive 5% of the equity interest in the Reorganized Debtors (subject to dilution by the Backstop Fee and the management equity incentive plan) in exchange for their claims;
- the general unsecured claims to be paid in full or reinstated; and
- a cancellation of existing equity in WoundCo without any distribution to the holders on account thereof.
DIP and Exit Financing
Certain first lien lenders will provide a secured superpriority priming debtor-in-possession ("DIP") non-amortizing financing comprised of
- a new money credit facility in an aggregate principal amount not to exceed $40 million and
- a roll-up DIP facility, pursuant to which each DIP lender will obtain an additional claim on a dollar-for-dollar basis for every dollar of new money DIP loans disbursed .
The DIP Financing will automatically convert into an exit facility upon the effective date of the Prepackaged Plan.
Capital Structure (as at Petition date)
|
First Lien Obligations: |
|
|
First Lien Term Loans |
$272,012,500 |
|
Letter of Credit Obligations |
$3,200,000 |
|
Second Lien Obligations: |
|
|
Tranche A Notes |
$80,386,076 |
|
Tranche A Notes |
$45,593,127 |
|
Total Funded Debt |
$401,191,127 |
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Regan Declaration”), John Regan, the Debtors' Senior Vice President and Chief Financial Officer, detailed the events leading to WoundCo’s Chapter 11 filing. the Regan Declaration states: "The Company has been adversely impacted by the challenges faced by the post-acute sector, which is a key end market. Post-acute providers have experienced multi-year occupancy rate declines while simultaneously seeing increases in the costs of providing patient care and structural changes in reimbursement instituted by the Centers for Medicare and Medicaid Services not yet offset by countervailing demographic trends. These structural changes include, among other things, higher operational costs driven by increasing regulatory burdens, lower reimbursement rates instituted by Centers for Medicare and Medicaid Services for patients, and patient migration to home health care. The decline in occupancy rates has led to reduced demand for the Company’s products and services, particularly in the rental segment, which is a major component of the Company’s business.
Further, the general post-acute sector disruption has placed many of the Company’s Customers under significant financial pressure, resulting in several bankruptcy filings, increased mergers and acquisition activity to divest under-performing facilities, and proactive cost reduction efforts, as well as fewer equipment purchases.
Further, because of the above described and related issues, a number of the Company’s Customers have experienced liquidity issues that have slowed the Company’s collection efforts and forced the Company to record higher level of bad debt expenses in each of 2016, 2017, 2018, and the first two quarters of 2019.
As a consequence of these issues, the Company has experienced significant liquidity constraints since 2016. Available cash eroded as a result of revenue declines, cash collection issues from Customers, and some necessary large infrastructure investments. In turn, constrained liquidity resulted in supply chain disruptions, which further eroded its core capital and rental businesses. Such supply disruptions inevitably led to stock shortages that opened the door for the Company’s competitors to opportunistically exploit the Company’s distress.
During calendar year 2018, due to a decrease in the performance of the Company, the Debtors experienced defaults on certain financial and reporting covenants under the First Lien Credit Agreement and the Second Lien Notes Purchase Agreement.
Thereafter, the Debtors breached a financial covenant under each of the First Lien Credit Agreement and the Second Lien Notes Purchase Agreement as of March 31, 2019, when their Adjusted EBITDA (as that term is defined under each of the First Lien Credit Agreement and the Second Lien Note Purchase Agreement) for the fiscal quarter ended March 31, 2019 fell below the respective $40 million and $36.4 million required thresholds. On May 31, 2019, the Company missed an interest payment of approximately $5.9 million under the First Lien Credit Agreement, resulting in an Event of Default on June 4, 2019, after the expiration of the applicable cure period."
About the Debtors
The Joerns Healthcare is a leading vertically-integrated manufacturer, distributor, and service provider of medical bed frames, therapeutic support surfaces, patient lifts and repositioning devices, and negative pressure wound therapy devices, among other types of durable medical equipment. The Company’s products include a number of industry-leading brands, such as the Ultracare® XT bed frame and Hoyer® lifts. Founded as the Joerns Brothers Furniture Company in 1889, Joerns Healthcare entered the healthcare industry in 1960 with the mission of improving the lives of people who need care (as well as those of their families and care providers) through unparalleled service, dedication, and compassion.
In August 2010, Quad-C Partners VII, L.P. and Quad-C Partners VII Co-Investment Fund, L.P. acquired a majority of Joerns Healthcare. In May 2014, WoundCo consummated a merger-of-equals with a portfolio company of Aurora Capital that owned the RecoverCare business (the “Merger”). The Merger created one of the leading healthcare equipment businesses in the United States. Joerns Healthcare has relationships with approximately 5,000 skilled nursing facilities, long-term care facilities, hospice agencies, and homecare agencies, as well as with the United States Department of Veterans Affairs (“VA”) (providing products and services to paralyzed veterans in their homes and in VA healthcare facilities). In addition, the Company assists its customers with wound management, fall preventions, safe patient handling, spend and asset management, and regulatory compliance.
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