[To be updated] April 7 , 2020 – Quorum Health Corporation and over 100 affiliated Debtors (NYSE: QHC, “Quorum Health” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-10766. The Debtors, an operator of general acute care hospitals and outpatient services in the United States, are represented by David R. Hurst of McDermott Will & Emery LLP. Further board-authorized engagements include (i) Wachtell, Lipton, Rosen & Katz as legal counsel, (ii) MTS Health Partners, L.P. as financial advisors, (iii) Alvarez & Marsal North America, LLC. as restructuring advisor (with A&M Managing Director Paul Rundell to serve as Chief Restructuring Officer, (iv) KPMG LLP as tax consultant and (v) Epiq Corporate Restructuring as claims agent.
The Debtors’ lead petition notes more than 100,000 creditors estimated assets of $373.1mn; and estimated liabilities of $1.262bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Wilmington Savings Funds Society ($421.8mn 11.625% Senior Notes due 2023), (ii) Blue Cross Blue Shield ($14.5mn) and (iii) Health Trust Workforce Solutions ($1.6mn trade debt).
In a press release announcing the filing, the Debtors advised that they had "entered into a Restructuring Support Agreement (the 'RSA') with a majority of its term loan lenders and noteholders on a 'pre-packaged' plan to recapitalize the business and significantly reduce the size and cost of the Company’s debt. Under the terms of this pre-packaged plan, Quorum Health will reduce its debt by approximately $500 million."
Bob Fish, the Debtors’ President and Chief Executive Officer, commented. “We believe the financial restructuring plan announced today will strengthen our business and enable our community hospitals to continue the important work they are doing in addressing the COVID-19 crisis, as well as serve their patients and communities…Quorum Health has been transparent about the need to restructure our debt over the past year. We believe the RSA will significantly reduce our debt and annual interest expense and better position our company, our affiliated hospitals, and our hospital management and consulting company, for future growth.
Overview of the Plan
As set forth in the Plan and the RSA, the Restructuring Transactions provide, among other things, that:
- All Allowed Administrative Claims, Allowed Priority Tax Claims, Allowed Other Secured Claims, and Allowed Other Priority Claims shall be paid in full in cash or receive such other treatment that renders such Claims Unimpaired.
- Each Allowed DIP Claim shall be paid in full in cash.
- The Holders of all Allowed ABL Claims shall receive indefeasible payment in full in Cash of such Allowed ABL Claims.
- Each Holder of an Allowed First Lien Loan Claim shall receive such Holder’s pro rata share of (a) the First Lien Loan Claims Paydown Amount; and (b) the Exit Facility.
- Each Holder of an Allowed Senior Notes Claim shall receive such Holder’s pro rata share of (a) 100% of the New Common Stock, subject to dilution by New Common Stock issued pursuant to (i) the New Common Equity Raise; (ii) the Equity Investment Commitment Premium; and (iii) the MIP; and (b) the QHC Litigation Trust Interests.
- All outstanding and undisputed General Unsecured Claims will be Unimpaired by the restructuring unless otherwise agreed to by the Holder of such General Unsecured Claim.
Restructuring Support Agreement (filed as part of an 8-K here)
On April 6, 2020, the Debtors entered into a Restructuring Support Agreement (the “RSA”) with (i) lenders who (a) constitute more than a majority in number of the lenders of the outstanding term loans (the “Term Loans”) and the outstanding revolving loans (the “Revolving Loans”, together with the Term Loans, the “First Lien Loans”) under their April 2016 senior secured credit agreement and (b) hold at least two-thirds of the aggregate outstanding principal amount of the First Lien Loans, and (ii) holders who (x) constitute a majority in number of the holders of $400,000,000 aggregate outstanding principal amount of 11.625% Senior Notes due 2023 issued by QHC (the “Senior Notes”) and (y) hold at least two-thirds of the aggregate outstanding principal amount of the Senior Notes (the “Consenting Noteholders”, and collectively with the Consenting First Lien Lenders, the “Consenting Stakeholders”).
- Existing Senior Secured Debt: The Plan contemplates that the Company will emerge from the Chapter 11 Cases with a leaner capital structure comprised of (a) a senior secured asset-based revolving credit facility, and (b) a senior secured term loan facility in an aggregate principal amount of $738.3 million minus an aggregate paydown amount of at least $50 million but no more than $100 million (the “Exit Facility”). Each lender party to the Debtors' April 2016 ABL Credit Agreement will receive indefeasible payment in full in cash of its allowed claims under the ABL Facility. Further, each lender of the outstanding Revolving Loans will receive its pro rata share of: (i) cash in the amount of (A) the aggregate principal amount of the Revolving Loans, multiplied by (B) a ratio equal to (X) the cash paid to holders of claims arising under the outstanding Term Loans divided by (Y) the aggregate principal amount of the Term Loans; and (ii) the Exit Facility. Each lender of the Term Loans will receive its pro rata share of: (i) $50 million to $100 million in cash proceeds, as determined by the Required Equity Commitment Parties pursuant to and in accordance with the Equity Commitment Agreement; and (ii) the Exit Facility.
- Existing Senior Notes: Exchanged for 100% of the new common stock of the reorganized QHC (the “Reorganized QHC”), subject to dilution for certain issuances of new common stock, and beneficial interests in the QHC Litigation Trust (as defined below). The Plan requires the Company to establish a litigation trust (the “QHC Litigation Trust”) for the benefit of the holders of claims under the Senior Notes.
- General Unsecured Claims: A holders of general unsecured claims against the Company in the ordinary course.
- Existing Common Stock, Restricted Stock, and Restricted Stock Units: Cancelled, no recovery
DIP Financing and Equity Commitment
The Debtors have received a commitment for $100.0mn of debtor-in-possession (“DIP”) financing ($30.0mn on an interim basis) from certain of its existing noteholders. The Debtors also received a $200.0mn equity commitment from certain noteholders that will be funded upon completion of the case and used to pay various costs and reduce debt (namely the Debtors' prepetition secured debt).
Events Leading to the Chapter 11 Filing
The Debtors' Disclosure Statement provides an overview of the events leading to the Chapter 11 filings which focuses on (i) heightened challenges faced by rural hospitals largely dependent on uninsured and under-insured patients and the Medicare and Medicaid programs that fill the resulting insurance gap as exacerbated by (ii) the Debtors over-levered capital structure: "Rural hospitals are limited in the number of patients they can expect to treat in a particular year, given the number of possible patients that live in a particular service area. The patients that are treated by rural hospitals often have no commercial insurance or are underinsured and use emergency room services in lieu of primary care providers. The Debtors provide care to treat these patients, but often receive no reimbursement for those services.
Rural patients are also more likely to rely on Medicare and Medicaid….Indeed, Medicare and Medicaid made up 49 percent of the Company’s net revenue for the year ended December 31, 2019. This is significant because hospitals receive payment of approximately 87 cents for every dollar spent caring for Medicare and Medicaid patients.
While these challenges do not by themselves necessarily prevent a rural healthcare company from operating profitably, when coupled with the Company’s capital structure and over-levered balance sheet, they have limited profitability and prevented growth. Continuing to operate in rural and mid-sized areas with the Debtors’ current capital structure would ultimately impair the Debtors’ ability to meet important working capital and operational needs, maintain ordinary-course business relationships, pursue strategic opportunities, recruit medical professionals, and otherwise reinvest in their operations and facilities. Following emergence from chapter 11 with a less leveraged capital structure, the Debtors anticipate that they will be able to operate profitably.
About the Debtors
According to the Debtors: "Quorum Health Corporation is an operator of general acute care hospitals and outpatient services in the United States. Through its subsidiaries, the Company owns, leases or operates a diversified portfolio of 23 affiliated hospitals in rural and mid-sized markets located across 13 states with an aggregate of 1,950 licensed beds. The Company also operates Quorum Health Resources, LLC, a leading hospital management advisory and consulting services business.
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