Envision Healthcare Corp. turned to KKR & Co. (KKR) as a white knight in 2018 when it agreed to be taken private for nearly $10 billion in the face of potential pressure from activist shareholders.
While the move seemed solid at the time, the deal left the Nashville-based provider of physician-led, outsourced medical services with $7.5 billion in debt. As of year’s end, the debt amounted to a lofty 7.4 times the company’s Ebitda.
Now Envision Healthcare finds itself one of the larger healthcare companies struggling to survive as stay-at-home orders across the U.S. prevent routine medical procedures. The company has hired Houlihan Lokey Inc. as restructuring adviser and Kirkland & Ellis LLP as legal counsel, according to reports earlier this month, while Paul, Weiss, Rifkind, Wharton & Garrison LLP is said to be counsel to KKR.
Envision could not be reached for comment. KKR declined comment.
An Envision Healthcare restructuring would be sizable, given its revenue of $14.7 billion in 2017 and just under 58,000 employees in 2017, the last full year it was a public company. The massive transaction would arrive in tandem with a projected surge in Chapter 11 filings because of the economic effects of the Covid-19 outbreak.
To be sure, Envision has been playing a role in fighting the pandemic. The company recently said it reassigned more than 500 clinicians in six states. It also directed its anesthesiology services unit to treat patients in intensive care to provide support to hospitals facing a rise in patient volumes.
“Envision is on the front lines now,” CEO Jim Rechtin said in a prepared statement on Thursday, April 23.
The company also said it reduced by 50% salaries of senior staff at the company, furloughed nonclinical workers and reduced pay for some of its doctors. And the healthcare provider continues to face clouds over its balance sheet.
Moody’s Investors Service Inc. recently downgraded Envison Healthcare’s corporate family rating to Caa2 from B3 and revised its outlook to negative from stable.
While the company offers “considerable scale and market position” as the largest physician staffing outsourcer, Moody’s said it expected Envision Healthcare’s earnings and liquidity to “weaken significantly” this year.
“The potential for additional distressed exchanges will be directly correlated with the duration and severity of ongoing coronavirus spread,” Moody’s analyst Jonathan Kanarek said in an April 6 research note.
The company also has drawn some negative publicity related to so-called surprise medical bills resulting from charging patients at the higher out-of-network rate, even if the treatment took place inside an in-network healthcare facility, Moody’s noted.
The surprise medical bill issue came up during Envision’s contract dispute with UnitedHealth Group Inc. (UNH) last year. It played a role in proposed law changes on the state and federal level to address the overall issue of surprise billing.
Amid this noise, Chris Holden departed as CEO of Envision Healthcare in February. He was replaced by Rechtin, who joined the company after working as president of UnitedHealth’s OptumCare. Pete Stavros, co-head of American private equity at KKR, and firm partner Max Lin praised the move as the two KKR executives sitting on Envision’s board of directors.
But the issue around surprise medical bill legislation remains.
“Legislative proposals currently being considered, if passed, could reduce reimbursement that Envision collects on out-of-network claims and negatively impact firm profitability,” Kanarek wrote.
Carolyn J. Johnsen, a Phoenix-based member of Dickinson Wright LLP, said the Chapter 11 route, or the more rapid prepackaged bankruptcy, offers advantages for a company such as Envision, even though it’s more expensive than an out-of-court settlement with creditors.
“In this economic environment, the key is cash — preservation of cash, conservation of cash and dealing with cash management is on everybody’s mind,” Johnsen said.
While Chapter 11 costs more, it also can allow a company to get more debtor-in-possession financing than it can without protection from the court.
Envision Healthcare also will likely try to renegotiate its leases for its many branches; Chapter 11 allows companies to assume or reject leases.
With less money coming in as a provider of elective medical procedures, Envision Healthcare is far from alone in seeking forbearance and extensions from lenders, as well as negotiations with its public bondholders.
The big question is what the business may look like once more states lift stay-at-home orders and revenue starts picking up again. The company may not be able to maintain the same interest rate payments it did before the crisis.
Tim Gary, CEO of Nashville-based data advisory firm Crux Strategies, and a member of Dickinson Wright’s healthcare and government relations practices, said Envision has plenty of company in the distress bucket for healthcare right now.
“You had all nonemergency health services curtailed, which captures the practices of folks in the vision business, dental area — even hospitals are laying off their day surgery staff,” Gary said. “Companies that were marginal or that had drama before find themselves running out of cash more quickly.”
On the positive, side, KKR stands out as a backer with deep pockets. The storied PE firm with $218 billion of assets under management as of Dec. 31 may choose a number of paths forward, especially if it’s willing to contribute more cash or equity to Envision’s balance sheet.
“There are lots of different plays for them,” Gary said. “If you have cash, you have lots of options. You can restructure in Chapter 11 and clean up any bad deals and bad contracts you may have had. The other option for KKR would be to increase their position in the company by buying out other owners — if they believe in the business model going forward.”
Steven Siesser, partner at Lowenstein Sandler LLP, said he’s not seeing a big increase in Chapter 11 filings right now. Court restructuring transactions are moving more slowly because of the Covid-19 pandemic, he said. The full economic effects of the crisis have not been fully realized, and he expects much more activity in the back half of the year.
“You’ll see bankruptcies uptick in the coming months,” Siesser said. “It hasn’t really started yet. There’s a ton of relief money being paid by the government right now. Companies are still paying their employees and getting by. By the end of the second or third quarter, companies will restart and what’ll happen is they’ll realize they won’t have the liquidity or resources to carry on. Some will survive. Some won’t.”
The numbers could be staggering. Out of 500,000 restaurant companies in the U.S., as many as 30,000 could end up in Chapter 11 or in Chapter 7 liquidation, for example. Tens of thousands of retailers may also be affected.
Many of these businesses are backed by private equity firms.
For Envision Healthcare, it’s possible a clogged federal court system could encourage the company to seek an out-of-court settlement with its creditors, vendors and landlords.
If an overwhelming number of companies were able to and decided to file in the District of Delaware or the Southern District of New York, then those popular courts might be overwhelmed, Johnsen said.
Whether a particular district would be able to handle an onslaught of bankruptcies remains to be seen, she said. The result could be delays in having matters considered, and the typical emergency motions and hearings might not be heard so quickly and deemed as threatening.
“Will a clogged system encourage settlements? Probably,” Johnsen said. “Delay translates to cost and uncertainty for all parties.”