Distressed Healthcare: Survival Tactics and Smart Investing During COVID-19

Date: April 30, 2020
Good morning and good afternoon. I’m Ira Coleman, chair of McDermott, Will and Emery, and I’m delighted to welcome you from a safe distance, of course, to our health restructuring webinar, and at McDermott, we’re incredibly proud of all our events. We bring together outstanding thought leaders to discuss leading topics. We begin planning our signature events at least a year or so out, and sometimes two years out, with our team spending months to ensure
the best possible experience, focusing on everything from engaging headline speakers to
the wine selections at our VIP dinners.
Today, however, we are operating under a different, new model, just like all of you are. Although we put our full room gatherings on hold for the time being, we have doubled down on really bringing you the best, most current insight that we hope will help you inform
to make better decisions you need to make and navigating through this crisis
and beyond. Over the past months in fact, we’ve hosted over 40 webinars on a wide variety of topics, with more than 10,000 clients and friends attending from across multiple industries.
Decisions you make today will impact performance, not just in the crisis, but for years to come. In short, who you listen to matters. Being your trusted partner in this really means everything to us, and it’s a role we strive to earn and maintain each and every day. So, thank you again for joining us today. We are truly here to help in any way we can, including with this great
session that we put together today. So, to kick things off, it’s my pleasure to
introduce my friend Jeff Woods, managing director of US healthcare practice at EY- Parthenon. Thank you, Jeff.

Thank you, Ira. Once again, it’s a pleasure to be here with you guys, and thank you for the opportunity to listen in on our perspectives. I’d like to start by taking the first 10 minutes
here and set the context for what I think will be a very interesting discussion to back into this,
amongst the panelists. What I’d like to do is start with the backdrop of what’s going on
in the broader U. S. Economy, so think about the 30,000-foot view of U. S health care system., take that die into how that’s going to impact healthcare spending, and then maybe leave you with, at least, our perspectives on some the differential impacts within health care sub-segments. I think this is time, there was some BA data released yesterday. It was for Q one. It looks worse than expected because of some surprises there. It was also, kind of, highly the fact that health care is actually leading this recession, which is very much different than what we’ve seen in most of the other economic cycles. So, I spent a lot of time with our chief economist Nigel Balt, and
we’re going to show you the perspectives on what we’re seeing the market and some ramifications for how we think this is going to play out. Next slide, please.

So, when we talk about the 30,000- foot view US economy, we’re going to see a downturn here
that I like to compare to the great recession in terms of the magnitude, which is going to be even worse, the time, which is going to be more compressed., and we’ll talk a little bit more about the lack of lag from healthcare expenditures here. But you’re going to go the left-hand side. We’re looking at a GDP forecast of about down 10% for FY. 2020, so for the calendar year 20.
And again, that compares with, you know, when I think we had a regular forecast in January, probably about 2 to 2.5%, and also the great recession we had, it was down about 2.5%. So, order of magnitude, we’re talking about getting to some unprecedented areas here.
You do see a very strong recovery in 21 and 22. Get that base case of 7 – 7.5% growth.
You know, we’re going to go down pretty hard, and it looks like we’re going to cycle back pretty hard as well, which I do think creates some issues even on the upside, in terms of being able to, sort of, meet some of the demand that’s been pent up in the health care system.
The right inside is some of the data that you may have seen the headlines about the quarterly growth estimates here, and I would be very cautious about some of these numbers are, kind of, headline grabbing but are generally very, very hard to sort of contextualize when you think about the course of the year. But you do see our base pessimistic and optimistic case on a quarterly basis for GDP spending. We’re down about 50% in Q2, that’s our estimate. That compares with some of the larger, you know, firms JP Morgan down 40% etc. But just keep in mind when you talk about that quarterly numbers, if you go down by 50% in the first quarter and up by 15% in the second quarter, you’re still down by 25% for the year, so that’s where those numbers get a little bit tricky. But we do like to show them, especially in our pessimistic cases, you see, when the timing of the recovery and what that looks like between a base in a pessimistic case. So, I just find it fascinating, as we typically talk in macro terms, is GDP going to be 2.5% or 2.6%, here we’re talking about is GDP going be down 30% or down 40%. I think that is emblematic of, sort of, the situation that we’re in right now. Next slide, please.

So, here’s the aggregated GDP for the U. S. on the left-hand side, about $21 trillion broken out by industries sub- segment. The ones that are shaded the dark red are going to be hit the hardest- things like food services, travel, retail. Those at the top are on the gray in this graph, are going to hit less. So, when we look at the right-hand side, and this is just the drop, call it February to April, just the drop for the short-term year. You can see where the overall GDP sits at about down almost 19-20% and you could see where the other sub sectors align on this. What is most interesting about this is where healthcare sits. In a normal recession, health care has about a half, the coefficient on GDP is about 0.5, so that means a 1% change in GDP leads about 1/2 a percent change in health care expenditures, and that effect is typically lagged by 12 to 15 months. What we are seeing in this cycle is totally different. Health care is instantaneously leading this, and it is cycling harder than GDP, and that is unique. And Kenley, the BA number that was released yesterday leads me to believe that we may be even further down the road of this, between 25 and
30%, rather than more conservative on this, so I think there’s a little bit more pain left to come here. Next slide, please.

So, when we talk about the macro, again, translating down into health care, I think this is important as healthcare investors. Left hand side here, we’re looking at the unemployment rate
and we’re comparing that to the great recession. You can see that in 09 from about 4.5%
up to about 5%. Today, in the COVID led recession here, we’re going to go from about 3.5% up to upwards of 20%, and that’s going to come very, very quickly. I think that you are one of the interesting things here is just what happens to those people when they lose their job, and that’s the middle part here, about 27 million people, and Kenley that’s been going up. It’s looking more like our pessimistic case. The 27 is our baseline case, and you can see what industries they’re coming off of, and why we look at that, because it doesn’t have ramifications for their insurance status today, and what that’s going to look like 12 months from now. And Ken, that’s the date on the right- hand side. So just know that there is going to be a mix of insurance of those people that come out of the workforce, where commercial insurance is going to drop, drop pretty precipitously by about 12.5 million people that will be offset by Medicaid and some of the uninsured. So, even in a recovery state, do you think 12- 15 months? I do think there’s some ramifications for this payer mix. A lot of health care businesses, they do think it has, sort of, a negative impact on some of financials, and then even for people who keep their job, there’s still
an impact with recessionary times of their ability to play for high deductible
plans and their ability pay after insurance. So, we are going to feel a little bit of pain there, even in a recovery state based on this sort of the coverage and mixture change we’re seeing there.
Next page.

So, this is how our GAP is now going to impact our health care expenditures and think of the orange line here as the $3.8 trillion of our health care spending. The GDP line is that $21 trillion
that we saw previously. And I highlight this in 09, so I think this is emblematic of the cycle that we typically think about in health care. You can see the GDP dip down. There’s that 2.5% drop in 2009 and you can see that lag effect and muted effect of health care expenditures. They did come down a couple 100 basis points, but that effect was lagged and muted. And if you fast forward this, this was our case in January at J. P. Morgan, our optimistic case for both GDP and health care expenditures. The healthcare side was around 5%, 5.5% growth for the foreseeable future. If you go to the next slide, you can see the new impact, the revised impact of GDP. So, here’s where you see that black line that GDP dropped down to the 10% for 2020 and then that steep recovery again on the back end, where you see that 7 to 8% growth in 2021 and 2022.

Now, if you go to the next slide, we’ve now modeled what should happen in our response to our healthcare expenditure. In a normal, sort of non-social distancing recession, this would have been the impact. Again, you see the muted impact and you see it lag. And again, that’s a bad news story, but that’s not catastrophic. Now if you go to the next slide, this is actually what’s going to happen. Here, we try to quantify the impact of social distancing. This is really important.
The impact with health care expenditures is going to be instantaneous, and it’s going to cycle harder than GDP. So that’s going to push us down to almost a -11% or -12% growth rate on that $3.8 trillion, and you can see where that drops in 2020 and the commensurate uptake in 2021 and 2022. So, that is kind of the bad news story here. That drop between our, kind of our, optimistic case and our base case now to the national health expenditure, requiring social distancing
is effectively $500 billion. And so the reason I think that’s important as you think
about the money coming into the system through stimulus, in my community, through some of the F mapping from the state and the Medicaid programs, you know, that’s about $150 billion right now, and I think we’re going to see a gap in our health care expenditures of $400-500 billion. So, sort of the net drive down, in both the recessionary impact and social distancing, is not being offset yet by the federal stimulus, it’s in the dollars per ticket system.

So, if you go to the next slide, we’ve tried to say, where is this $500 billion going to be coming from for our health care expenditures? This is an eyeful here, but this is where we spend $3.8 trillion. This is basically the hospital’s physicians and other providers. You see where life sciences, which is drugs and devices, you see the payer, which is sort of the SDA and profits
of the payers, and you do see some government spending here and we just try to shade those
colors, you know, between most negative and most positive. And, you know, I think, as you look at this complex turn, I think it is complex, like there’s a differential impact on health care system of what’s going on right now. There is much more red and much more pink on this chart than there is green, and there’s a couple pockets that you see is having some favorability here.
But in general, I think we default to there’s going to be pain across the board for most of the providers, almost all of the providers family, and most the participants and helpers.

The next slide is a little bit of an easier way just to see that, and you could see this is just maybe a more digestible version of how we see this differential impact on health care. But you do see, you know, things that have spread out here and I said, I think if I talk a lot about some of the providers here, especially the activities of the physician practice management and there’s differential impacts here, you know, can they’ve been start. You know, some of that sort of dental etc. down 70, 80, 90%, you know, it was described in the last McDermott session is that, you know, almost in solvent right now, and I think there’s a big question about what, how that returns and what that looks like on the back end. There are a couple things on the right-hand side that I think are interesting, and obviously, you know, the obvious ones are things like telemedicine, but I do think we have seen some growth into some activity within, certainly, Medicaid services and just the overall 78 million people coming to Medicaid and what that might look like, as well as some, basically some folks that are benefiting from the lack of utilization, either wholly insurance risk or risk bearing providers that have seen favorable MLRs
because of the lower utilization here.

The next page maybe just shows you a little bit of what we’re talking about contextually with some of the drops here, and we say that the pain being felt, you know, we do have some decent data that came out last week from the from the Commonwealth Institute, looking at some of the drops among medical specialties, surgical specialties, primary care and some of the others. And again here, you see, that dramatic drop in the month of March can lead to the tune of 50 and 60%. So, I do think we’re going to see that, and we’re going to see that play out of the next 3,6,9,12,15 months in terms of how these businesses respond to this environment and family,
how their financial structure, you know, either allows them to survive or if there’s other things that need to go on there. And I will end with the last line here is just about the recovery and anticipated timing of what’s going to go on here. And I don’t think anybody would say that they have the crystal ball, but as we think about what’s going on right now, we’re kind of screwing with that Q 2 of 2020… that with phase one where 50-60% that cycles harder for certain types of practices in certain businesses in healthcare. I think over this summer we’re going get some easy into the social distancing. I think we’re going to get some rapid video diagnostic testing and more
prolific testing that will raise up. I think the cue for, kind of, that phase two of 2020 is the biggest question mark. Like what does that look like in terms of our ability to recover, the ability
to get back to normalcy? Or do we get a very, very strong onset of the fall flu season, winter flu season and finally pushes it backwards. And then finally, I think there’s a lot of questions about,
you know, when we do finally get a vaccine, were saying that’s 2020 before the fall season of 2021. Excuse me, we’re saying the vaccine would be the fall of 2021 before the onset of that next flu season in 2021. And then what happens in a return to steady state? Do all these volumes come back? Do things look as they have previously, or is there volume that shifts to other settings? Is there volume that maybe doesn’t come back? Are there things that get postponed that just never really get back to normal again? I offer probably more questions than answers there,
but I think that’s at least the debate we’re having with our teams and family. Hopefully we’ll elucidate some of that in the panels to follow. So that’s six weeks of chaos in about
10 minutes here so, with that, I’m going to turn to Felicia Perlman,
who is the global co-head of restructuring insolvency for McDermott.
Hi, everybody, thank you guys all for joining us today. We know there is a lot of uncertainty today regarding the impact of our current situation and how you best address it and manage it for health care entities, not just to whether what’s happening today, but also for long term success.
And on our panel today, we have an incredible group of both advisors and bankers with significant experience in the financial challenges that are facing health care entities to help share with you some of their observations and some of their strategies for moving forward. And with that, I’d like each of them to introduce themselves, and Paul, I will start with you.

Good morning, Paul Rundell. I’m a managing director with Alvarez and Marsal restructuring
practice and I specialize in healthcare restructuring.

Good morning, Louis Robichaux. I’m a senior managing director at Ankara and our restructuring group and I specialize in healthcare turnaround and restructuring.

Thank you, and Blake. Very sorry.

Happens all the time. I’m a senior managing director with Guggenheim Partners. I lead our health
care services practice.

Thanks, and Keith, please.

Keith Lockwood, managing director on health care services at Jefferies.

Great, thank you, and thank all of you for joining us today for the panel. I wanted to start with you Paul in what should health care entities be doing right now? What is important for them to be paying attention to today to protect their operations? Sure, thanks Felicia I think the first thing you have to understand the inflows that hopefully the providers were getting from the government, including medical advances, as well as the grants that are flowing now, and it does depend whether you’re a physician practice or acute hospital of how much you get and when it comes, but those funds have started now for last couple weeks. The second thing I think you have to break down the COVID into a couple different phases. The first phase is really the
I like to call the bleeding phase where unfortunately, you go from an environment where providing full service to patients to being forced to do only essential COVID services. Even the hospitals knocking out a significant amount of your volumes as well as your profitable volumes.
The second phase is then, the what I call the, the phase of the cares funds, the flowing of funds,
the grants in the advances and ends to return to normalcy phase. And Lewis is really going to speak to the last phase in, you know, a lot of my clients ask me, how do I get through the first
phase? It happens. But how do I get to the second phase so I can talk to or hear what Lewis
doing? And it really goes to speaking to your difficult situation sees and working on a plan to elongate the runway. So, one of those ideas is to work with your lenders, work with your less sores. I’m getting rent deferrals, getting mortgage deferrals, as well as work with your trade getting extended terms. I think the key to this is easy to talk about. It’s really just communication. I think most of these decisions are gone through the same type of challenges that the hospital providers are facing. So, just being forthright, honest and being fact based will help you get through an honest confrontation and give you the runway.
And with that, I’ll turn it to Lewis to talk about how to get back to normalcy.

Lewis, one of the next things is people are OK. We’ve gotten through today, but, that’s really only the beginning of it. So, what should they be paying attention to as they move into phase two and phase three and what are some of the biggest concerns they should have?

Sure, Felicia. Thanks. So, obviously this is playing out real time when our clients are asking us that. Now, we’re advising them across a number of things. But the first thing we talk about is, obviously, if you’re in this business, you need an operational ramp up plant in an actual plan, and it needs to be complete with financial projections. But the financial projections, it goes way, way beyond that. One of the things that our clients are wrestling with right now, especially on the hospital side is what authority or guidance will these health care businesses be looking to, in terms of, ramping back up and taking non-essential businesses? And what I mean by that is, state regulators are not being of any help here. So, picture yourself, perhaps in a lawsuit. 1,2,3 years later, someone accusing of one of your clients on opening up too fast. Okay, so what guidance are you looking to today to understand what things were safe to do, and what an operational phase and plans should look like. There are also all kinds of employee issues
that you’re going have to struggle with. Reactivation recruiting or pulling back in furloughed employees. How are they going to feel safe? Availability of PPE. PPE is not just needed for COVID related patients, but also when you dip your toe back into non-essential procedures as well, okay? But frankly, some of the same things that Paul mentioned about what you should be focused on now, you should be focused on reentry phase. Cash is king. You’ve got to get a really
good handle around your working capital needs as you build back up. So, for instance, just because you start doing procedures, in May doesn’t mean your cash is going to start flowing in in May. You’ve got to understand your payer mix, and when your payers will start paying you.
You got to also understand you’ve probably been dealing with nervous vendors, and they’re not going to be interested in extending you a lot of terms. So normal course accounts payable terms you may or may not have. And one of the things I’m really worried about is some of the tricks
of the trade that Paul mentioned about how providers are extending their runway now, such as deferrals, deferring the payment of payroll taxes, receiving these Medicare advances. Things that are pure deferrals have to be repaid on a schedule. So, as you’re putting together your ramp up plan and financial projections, you’ve got to understand those are going to have to be repaid.
Paul mentioned, communication is key. Do not underestimate the amount of communication you’re going to have to have with all of your stakeholders and constituents of your business as you ramp back up. Keep in mind, they’re going through the same things as you’re going through.
And, don’t get frustrated with the amount of communication that you’ve got to have, because this is really unprecedented times. The last thing I’ll say is, and this is something that Paul mentioned as we were preparing for this. Don’t expect the relief you get in this. The government relief be it deferrals, be it grants, whatever. This is not a windfall. Expect audits, expect to be pressed to reconcile what costs that you incurred under COVID 19. And if all of the sudden you find yourself thinking that this is an evened out pick up or a windfall or you’ve got extra cash, that should be a red flag. Probably somebody’s going to come back at some point and want some of that money back. Those are the things you should be worried about. I’ll pass it back to you.

Thanks. So, you were talking about the money coming in, whether it’s the government money or otherwise, you know, obviously one of the key problems right now it is liquidity, which you think will lead many entities to currently be out in the market looking for financing, or to do
so over the next quarter or two as the impact becomes more apparent. Barry can I ask you, what are you seeing right now in the market? Are you seeing success with getting financing? How do you think that that can be improved for entities, and how do you think that will transition as we move further through this and out of this current crisis?

Thank you. Well, what we’re seeing, first off, is that banks are being very accommodative. So, if this is a covenant issue or something like that, generally covenant relief is being provided, and that’s out there, and management teams, I think don’t feel as much pressure about that is, perhaps they once did. Every healthcare provider, as Paul and others have mentioned, the government money is driving a lot of their decision making about what they need to do and when with regard to financing. I think one very common theme that we have seen is the CEO management teams
of the companies who are starting to feel financial distress, they’re tending to wait until there is a much more clear line of sight to a liquidity issue, or, you know, something like that. And what we’re advising is to try to get ahead that early. I think the financing markets, including some kind of newer financing markets to consider are open. I think the syndicated bank market, that was completely shot. It, you know, it’s not now. I think it’s starting to thaw. High up bond market is open, I think in terms of common equity and convert, you know, they were where they are now versus three weeks ago is very significant improvement. But for these really distressed companies, what we’re spending a lot of time talking about, a lot of time, is the financial sponsors, you know, they’re not sitting on their hands. I mean, they do have portfolio management, that they have to do, but they want to put money to work, and they want to put money to work in the form of pipes. Mostly, they’ll do anything from, you know, debt first leaned out all the way through to common equity or common being something in the middle of
that, something with some debt and equity- like features. What they’re looking for, you know, great companies with bad balance sheets. And I think once a company just transitioning from
that once a company has gotten to a point where, you know, restructuring discussions are happening or lenders are organizing things like that, what we’re finding also, is that lenders, you know, they’re generally they’re trying to employ a carrot and stick approach. They’re not just, you know, going to the companies and/or sponsors, with, they’re not jumping right to lawsuits are nasty letters. They’re trying to go with a plan that demonstrates how dire or not the situation is, but also, a solution to show that they have been trying to look at it, you know, from the lender’s perspective. So, I think, that’s really sort of I guess what we’ve been seeing generally, but I think just again right now, but place for distressed companies to get financing, I think, mostly is private equity and hedge funds.

I would just add to that, Barry’s exactly right. What we’re seeing on the financing side is, we’ve in the last two weeks executed for rescue financing, including our first health care services for surgery partners, where we did $120 million add on to a syndicated deal. The market
was incredibly receptive. It was really viewed as an expensive insurance policy by the market. On the private side, the last several weeks, we’ve picked up a handful of mandates ranging from $50 million raises to $250 million raises, anything ranging from the minority equity side to second lien, notably, second lien will be a very highly structured piece of paper, and these are either, often these securities are between either the second lien and the equity or in between the senior and the act and have a component of cash, paid pick convertibility, different liquidation preferences, etc. So, it’s starting to pick up in that front on the financing. I think there will be certainly more to come on, I think any issuers contemplating it, as kind of everybody’s pointed out, you rather tend to want to do that sooner rather than be in late to the ball game.

When you’re talking about the financing, you know, we’ve been talking about the health care industry kind of in general as one industry, but we all know that there is a lot of variety in the different sub sectors. Are you seeing a difference in terms of the financing of different sub sectors in the industry? Either Barry or Keith?

They’re all hit, I think health care service is getting, you know, hit very hard. That’s probably counterintuitive to a lot of people, but, you know, health care providers in particular, anything from the acute care hospitals of behavioral hospitals, you know, all the way to some degree, even though we believe they’ll be of a long term winter and even home health. So, these sectors, you know, are getting hit very hard, all the providers, really. The PPMs, particularly outside the hospital setting, you know. You know, they’re getting hit extremely hard, as others we have
have referred to make the long term. If I had to pick one long term winner, Telehealth.
I think that’s probably very intuitive to everyone listening. That is something that there are stand-alone providers that provide that service to providers. In addition to that, I think that providers themselves are growing that capability internally. So, and I think, lastly, just because it’s such a big part of the market managed care has fared very well during this crisis, relative to, you know, the providers. So, you’d rather be on the payer side in this environment, in terms of profitability and cash flow than you would on the provider side, but go ahead, Keith.

Yeah, I agree. And you’re seeing the lenders being very discerning about that between credits, more so than ever and its reflected, obviously, in pricing and for all risk profile. The multi-site retail health care business is incredibly impacted, but, you know, what I would say is there are some at least, you know, positive signals that I picked up in the last couple weeks, in the last really week, speaking of two providers this week, who have states that are finally opening up.
One group of clinics added hours and started an extra days to, you know, two dozen clinics
in their network, and in one particular state where electives are opening back up, surgery cases are scheduled for four weeks out, 12 hours a day, according to some surgeons I spoke to. And secondly, we did a survey of 1300 consumers last week and where over 50%, slightly over 50% of delayed physician visits, 60% of that cohort has rescheduled within the next three months.
So, very positive signals that we are going to have, in some sectors, a sharp recovery
and certain sectors more so than other. Barry was also correct on Telehealth. It’s on fire. Any provider who has the ability to do Telehealth is doing it or should be doing it. Including home health, physical therapy, urgent care, etc. across the board.

In addition to financing, another avenue we’ve come turn to is sales, whether it is looking for
troubled entity to merge with another to create a better platform or looking to sell itself in order to address its own liquidity issues. Keith, how has that changed in the current market, and what strategies do you see working and problems with that currently?

Sure, there are still deals happening. Certainly not nearly as many as pre COVID, but a couple different data points. We signed a deal, I guess it was last week. A $1,000,000,000 plus in behavioral space. It did have an equity backstop. What’s interesting about that, too, is
there were several financing proposals, including roll over from the existing lenders, but also a couple other direct lenders. So, I guess the point is, while somebody mentioned earlier the syndicated market is somewhat shut down and stung, it’s starting to thaw out, slowly coming back. Direct lenders are still open for business, again, they’re going to be very discerning,
and again, pricing is 200- 300 basis points, on average, higher. We are starting to see more roll over, and in one instance, we’re seeing some cellar paper as a method of financing,
and even some creative structures are going to be utilized to get deals done in this market.
From rollover, increased roll over, contingent payments are cropping up on two transactions we’re involved in where there’s essentially delayed purchase price. And then for the severely distressed, and we have a handful of them underway, there’s a couple 363 processes and health care services that we’re running. We’ve got one potential friendly foreclosure with an asset purchase underway, and a couple other distressed sales. So those are absolutely happening as well. So, deals are getting done, but they’re slower and certainly more complicated and definitely a very bespoke transaction by transaction.

It would seem like the slower would be problematic with the financing, issue, having the time to get financing and longer to get a transaction completed.

Well, I’m glad you mentioned the financing because one thing that we are seeing, even in private situations, and we’ve got a handful of these that we’re working on right now are just horizontal stock for stock murders, because the value synergies becomes, you know, it a way to deliver at the same time that you’re creating value. So, you know, that makes sense, and you can understand that in the public setting, but we’re even seeing it sponsor to sponsor. There are discussions going on in some of the harder hit sectors about just merging together, notably
cash in, and like I said, it’s one of those times where you can create some value and deliver which that ladder being super important at this moment in time.

There will definitely be some stock for stock mergers, as result of this, no doubt.

So, to go back for a moment to the differences in the sub sectors, and Louis and Paul, we were talking about how to plan from a cash flow perspective, and really looking at what your liquidity hole is, that kind of by definition, requires having a sense of what the ramp up is going to be, which obviously is going to vary by subsector, as well is by the economic conditions. Can you give us your thoughts on sub sectors that were likely to ramp up more quickly or more slowly, and how entities in those can now plan ahead to address some of those issues?

Sure, I’ll start Louis, and then you can jump in on your experience, because I think it depends on the essential. You know, the PPMs dealing with oncology are less hit, and they’re going to keep rolling because it’s a little bit more life- death than the dermatology, for instance. So, there’s going to be a dichotomy in the PPMs between the necessity of seeing those physician types, and how fast they ramp up between the sectors. An example, behavior health is getting crushed, but it’s a necessity that most people have forgone for the last 30 days but will have to get back to it. So, I think it really does depend on the consumers and how well they need those type of services.
And then I think I heard, it was either Barry or Keith mention, you know, the hospitals are going back to the electives. Certain states have started to allow it, and I think you’re going to see the acute providers getting back to business partially in the end of the second quarter, fully in the third quarter, and I think a lot of these surgical centers, I imagine the third quarter they’ll start to ramp up as well. I’m not sure Louis, do you have some different thoughts?

Yeah, so I think those providers who feel like they can jump back in are going to try to get back in as much as possible. So those PPMs in the subspecialties That kind of track patients are they’re going to try to get back in as quickly as possible. Or the hospitals. I think that’s going to be a little slower. In fact, the Texas governor came out this week and announced a face plan to open the state back, and he was very explicit in saying that hospitals, beginning in a week from now, can start non-essential procedures. That said, hospitals are required in the state to reserve 50% of their capacity for potential COVID patients. So that, you know, if they’re complying with that, they’re going to have to ramp up more slowly. I have a hospital client right now that that
is in the process of planning for exactly what they can operationally start to reopen for, and they
believe they’re going to be PPE constrained, that they couldn’t go back to 100% of nonessential business right away, even if the physicians were there, even if the faces were there because they’ve got other operational constraints. So, I think you’re going to see hospitals coming back a little more slowly than maybe what they would like. Yeah.

Oh, I’m sorry.

Go ahead.

Just one thing to add to that is when the ramp up occurs, a lot of the providers have short term payables and long-term receivables. And to the extent that there’s variable cost in their cost structure, which there is in all of these, they have a working capital need that they’re going to have to find. So, it’s another to issue that could face industries, or sub sectors that ramp
pretty quickly. You know, you might put a ASEs in that category as an example, when they ran, they’re going to have a liquidity, ironically.

And eventually a shifting payer mix from the unemployment spike as well, which for folks on the Medicaid roles is not the best margin enhancement for any business. Sort of a quick ramp up in costs, and the question is, will your receivables come in even more slowly because of the
shift in the payer mix?

If the payer mix stayed the same, you’d have a problem, but to Keith’s point, it gets worse with the shift’s impairments.

So, let me ask you, given that this is all the, looking at the ramp up and the reopening of different service providers and non-essential services, which is really over the last week, have you noticed a shift in the conversations with lenders or other key vendors and their willingness to be part of the solution as they see things opening up there?

There is, there is some willingness to move. It really depends specific situation, you know, but by specific situation, really. Speaking to some of the direct lenders, there are handfuls the companies that either they’re going to take the keys on or they’re in discussions with sponsors real time on what to do. We really still need to see some of the numbers manifest itself. Some of the April numbers come in. Many view April, and potentially May as the trough months, but we need to see what the true numbers look like.

And we have actually seen a few, you know, more than a few direct lenders, even, take the keys
to companies recently.

Beyond the lenders and landlords, I would say, though, in terms of garden variety operating vendors, I’ve seen remarkably little flexibility.

Well, it’s interesting you say that, and particularly about landlords. That’s been our experience
as well.

That’s interesting. You wonder if that’s does it vary by landlord based on their own situation and their ability to provide flexibility or just a last of understanding of the long-term impact both on them as well as their tenants?

Well, I think, you know, if you’re talking health care, and you’re talking that landlords being REITs, what you saw early on, it has stayed the same throughout this crisis, is the REITs absolutely got hammered. And a big concern, I mean their stocks are off by more than half since
this prices began, and it was, and is, concerned about the tenant’s ability to pay because, you know, a lot of the health care REITs, the tenants of the tenants, you know, the people that live in these facilities or being treated in these facilities, they are the target population, so to speak, for COVID. So, they’re experiencing census declines, significant admits, new admits are just off,
tours in, say, assisted living facilities or independent living, again, have come to an almost halt.
So, you know, you got census going down. There’s not a lot you can do about it but to REITs themselves, and I’m not saying they want to, but to the extent they did want to provide
some liquidity to their tenants just as a lifeline, they’re limited in their ability to do that. Under the REIT regulations.

That makes sense. I want to thank all of you for participating in the panel today and all
of you who are watching and listening, for joining us today and with that, I’d like to turn it over to my partner Fred Levinson, who is global co-head of our private equity practice, at McDermott Will & Emery for the next panel. Thank you.

Thanks Felicia. Next panel is on the art of the deal during the COVID 19. As Felicia said, I’m the global co-head of our private equity practice, and I’ll let the analysts introduce themselves,
and I’ll start with Mark Francis from Houlihan.

Hi, thank you, Fred, for having me on the panel today. I’m head of healthcare for Houlihan Lokey, I’ve been in health care for about 30 years and closed about 200 mini deals and pleased to be a part of a panel.

And Brad Giordano.

Hi, I’m Brad Giordano, I’m a partner in the restructuring group in McDermott, based in our Chicago office. My practice focuses on sponsoring better representations in court and out
of court. I’m looking forward to the discussion.


Good afternoon, Peter Kaufman, I’m the president of Gordian Group, were a boutique investment bank that specializes in advising companies and private equity firms in how to solve difficult, complicated or distressed capital structures, and we have the unique distinguishing feature. We never represent financial creditors, so we give unconflicted advice to a board seeking
to advantage shareholders in these tough situations.


Hi, Seth Pearson, I’m a partner with Wellspring Capital Management. We’re a middle market, private equity firm. Generalists, but do a lot in healthcare. Specifically, I spent a lot of my time
in post-acute services, DME, and distribution

And Bob.

Hi, good afternoon, Bob Snape. I run videos investment bank in special situations practice based in Boston.

So, we’re going cover, you know, an overview of what investors and advisers are looking at short and long term of buying selling companies in the current marketplace, and obviously this is unprecedented times, but the first question is for Mark, you know, prior to COVID, you know, the health care market was robust. And now, in light of COVID, you know, how could private equity firms or strategic buyers get deals done?

Sure. The great question. It’s probably the question of the day for a lot of people. You know, look, in many volume is down around 75 or 80% in general gerald market and in health care,
and I think you know, if you think about the umbrella of risk tolerance and capital
priorities and allocation, people are approaching the opportunity here in a different way. Some people that are looking to buy great companies and great teams that are quite frankly pre COVID
prices, and others are trying to look at stress and distress. It’s going to get value in
today’s market versus six weeks ago. I think people are approaching it differently. I think the complexity around COVID 19 is requires the counterparties work together more effectively.
There are more complications we were just dealing with, for instance, stimulus dollars. There’s three or four different mechanics, and the risk allocation among the parties has
changed. You’ve got to find the right mix and balance around that.
As we have thought about this uncertainty and talked to a lot of both proud, equity clients and strategics, I think, you know, some companies went into this crisis in not the best of shape. So, they somewhat, people looking at pre COVID prices as kind of a baseline evaluation. And
then how you’re impacted today, and is that evaluation going to change? In some cases, yes.
In some cases, no. It somewhat depends on the depth and duration of what you’re talking about.
But I think on the healthy side, on the positive side, where people are looking for really pristine
companies, they’re to be aggressive on the evaluation in terms and speed, but it’s probably likely inspectors that they spent a lot of time in already. Probably with management teams they already know as a comfort and confidence backers. And then people will be looking for a path to success, particularly on the private equity side. I mean, the investment banking side, if
you go to sponsor and said, hey, we’re going to go to 100 people, come join in this process, a lot of people, I think, in this environment pass on that. So, we’re thinking about more limited way, very selective processes for things that are unimpacted by COVID 19 or marginally impacted. And a lot of these in the retail multi side area, we’ve postponed process of the last couple months. But people are looking to be effective and I think on the distress side or stress side, a lot of funds were buying liquid loans in the secondary market two, three weeks ago, but prices really
plummeted, I think for the most part that is abated. Two things with trading kind of the high 80s low 90s, the most part, and I think people are looking to figure out which sectors and companies they want to invest in. So, everyone has a little bit of a different approach, but everyone’s trying to figure out a path to success and a feed and that would make sense for them, their committees will be comfortable with. On the strategic side, you know, Fred and I just worked on a deal they got signed this week. Strategic on strategic deal. It was one where the buyer had existing facility they tapped for the acquisition, so we didn’t require them to go externally. But if you think about things that are going to be effective in this market, it is certainly, we’re starting to see all equity deals being approached, seller notes, contingent payments, I mean the range of tactics we have to deal with the uncertainty is definitely there, but it is going to require, I think, particularly for the bigger funds, they’re going to use their size to their advantage in this market, less or more so
than they did in the last one. So, lots of creativity, flexibility, and discussion.

And Seth, from a buyer’s perspective, what alternative acquisition restructuring strategies are you seeing, whether it’s buying equity assets debt, either at a discount or loaned own strategy or
recapitalized, you know, a good company with a broken balance sheet as one of our panelists said earlier. You know, can private equity or strategic buyers use this financial distressed environment to try to maximize the returns?

I think what someone on the prior panel said, I mean right now I think there are a lot of opportunities possible across the capital structure. You know, financing markets for regular deals are, you know, untrustworthy at best, I think right now. I mean, I could attract lenders. Syndicate markets are effectively closed. Direct lenders or just trying to figure out what the portfolio really looks like. So, I think that they can get on a path to proceed asset with lender who knows the asset already. Luckily, as Mark knows, we never look at pristine assets, so that’s not our problem, but I think, part of the way we’re dealing with them. I think you’re hearing other firms dealing with them. We have a vehicle called spring capital, which is effectively
anything but traditional equity vehicle. You know, first leans second leans for vertical equity, you know, where you can provide. I think somebody said earlier, you know, great companies with bad balance sheets, I think can be a lot of opportunities like that going forward, which either
your equity needs, working capital needs, as they accelerate out of this, add on acquisitions. We’re looking at a couple of opportunities with add on acquisitions where the financing fell through during the COVID crisis where it’s obviously going to be very expensive, but for some, you know, I think where we could get an acceptable return from some mixture of terms. You know, liquidation preference, etc., but ultimately provide a buyer with the company. You know,
that’s bad at some point when the company gets sold. I’d also echo what Mark said. I mean, I think opportunities from you know, I think opportunities from the secondary market is pretty much closed right now. I think that passed. I think that might come back. I personally believe that the public markets were completely divorced from the reality of how bad this is right now. But I think has stop making interest payments and stop making payments on the company months. I think you can see that come back more opportunities there. And I’m sure that will be more of their own opportunities. I think the thing that, that’s not really what we do, I think what
we’ve been struggling with was our strategy, that at least like now, time perspective. I think most of the companies an opportunity of seeing where that was not, we’re having pre COVID. So, it’s really a question of, you know, is that something? You know, I’ve been using that as an excuse.
Was this a fundamentally- does this company really want that as an opportunity? I think, what we’re seeing, a lot of thoughts right now is probably not. But again, I think as the months go on and people kind of figure out what they have left with out of this crisis before perusing opportunities like that.

Thanks, Seth. Peter, from your perspective, how should private equity firms or others, you know, think about workouts and restructuring today’s healthcare environment in light of COVID?

Thanks, Fred. Well, you know, you’ve got the baseline of private, you know, sponsor in any
industry starts with, or should start with, if they’re well advised, we’ve got two things as old equity. You’ve got option value, and you have control until you don’t. And so, the building blocks are to develop a game theory on how to slide value from your creditors to the shareholder, take control of this. Achieve your goals, whether it’s to get a stretch out, whether it’s to get more
capital from lenders, whether it’s to get covenant relief for a couple years, and so you need to develop carrots and sticks, it’s all very dependent on the given situation. You’re going to develop valuation arguments that capacity views. Do you have new money to put in yes or no? What do the credit documents say, what are the weaknesses in the lenders credit documents? And you need a unconflicted view of how to craft your most powerful arguments to your lenders to make them do what you want them to do. And very often, the backdrop of that is what you can do to them in chapter 11. And you come up with credible arguments about how you can treat
them in chapter 11 that will give them an incentive to play ball with you outside of Chapter
11 along a solution that you like. So that’s the baseline at any private equity sponsor potential work out. You know, you want to take, you want to look at the strip evaluation waterfall and say, who’s the biggest loser here? If something doesn’t get done, advantageously, and it’s usually the lender, because the sponsor on a strip waterfall basis is often going to arguably be out of the money. And our role is to make sure that that doesn’t happen to upend that strict priority evaluation waterfall. Let’s take it from the creditors and give it to the shareholders. So, that’s the baseline. Then you layer onto it, the specialties of a health care restructure. You know, you’ve got continuity of care, huge issue, a lot of uncertainty. Even if it’s a liquidation, someone’s going to have to fund that, and if the lender is going to take it over, it’s going to have to be the lender. Uncertainty is the friend of the sponsor, in my opinion. The more certain things are, the more clear things are, the more that the lenders are going to be emboldened to do extra Y, and so we like uncertainty. If you go into chapter 11, if you can threaten a credible chapter 11 then
you’re going to have a pico in there to deal with the continuity of care, the treatment of provider agreements, physician owned capital structures, there’s a whole set of overlays healthcare that play into the strategies of what a sponsor wants to do to try out to almost take advantage of a tough capital structure situation.

Thanks, Peter. And Bob. What types of deal… hurdles, the New Deal terms have you seen during this current crisis?

Well, it’s really a rekindling of some old tried and true provisions. I mean, certainly, newfound emphasis on matt Clauses, MAE Clauses. You know the words ‘pandemic’ finding a way into purchase agreements. You know, a rekindling again some of the economic concerns in a MAE or a matt clause, you know, really getting heightened scrutiny now, even at the other letter of intent stage or even earlier, some provisions around that and what a second wave might mean
in that regard. And then, you know, if you’re not dealing with buyers that are thinking about an all equity deal or an equity only type transaction, or they have captain debt or seller note type structure, you know, financing contingencies, which obviously, you know, the last three or five years, you know that you wouldn’t think of signing and even an L Y with a financing contingency just given the liquidity in the marketplace and the competitiveness of the marketplace. Now going forward and what we’re seeing and deals that we’ve rekindled, you know, that we had in the market free come of it, financing contingencies are, you know, just a fact of life, obviously, in this environment. You know, given where the senior debt markets are, or are not, for that matter, you know, in the mid-market, in the private markets, you know, there are some regional banks now that are at least looking at deals. That doesn’t mean they’re getting them through credit committee, but they’re obviously more open minded than they were, maybe at the start of this month. But they’re looking for 5th 50% equity contribution. You know, in a structure, obviously pricing 200-300 basis points higher than where we were, pre COVID, and overall turns and covenants- much more stringent, restrictive. So, the cost of capital is going
up, you know, considerably, and that has a direct impact on evaluation. And so, you know, to get
deals done or your seller clients to get them in the mindset, if we can get something done here, you know, it may be a minority equity deal. Now, what was a change of control deal rejected, may be now a minority equity deal to share the risk going forward. Seller papers has been mentioned earlier. That’s really cropped up in the last few weeks on our transactions. And
then earnouts are, you know, it’s finding that basic …, you know, with a corona virus in it.
In definitionally, you know, how to get around that? What’s the period? Where are we in terms of that timing and then, you know, trying to set a baseline need of die, and then hurdles and thresholds in terms of the contingent payments. You know, we’re going through that, those battles, you know, in a narrowly basis currently in our practice on the deals, you know, we’re trying to salvage and move forward.

You know …areas, you know, the private equity is to teach buyers need to consider in this unprecedented environment, and how can they protect themselves?

Thanks, Fred. Right now, there’s a bit of a mismatch in expectations, so there’s money to be put to work. However, there are expectation differentials between those looking for deals and those trying to hold onto assets, and not so at the bottom. This can, you know, that mismatch plays out particularly strongly in situations right now, where a sale or some type of emanate transacted, it’s meant to be the way out of distress situation or liquidity prices. There’s plenty of risks out
there, so I’m not going to spend too much time on them. But obviously, one of the biggest is
a lack of insight and how long this plays out. What interim funding options will be available
to bridge to a marketing process or a deal and what the recovery looks like on the back
end for the business. So, you run into kind of valuation struggles on both sides of the deal, and obviously, depending on the business we’re talking about, whether it relies on elective
procedure during dental, you know, we may think that it’s going to be a little slower. We kind of touched on it earlier, but there’s stress on a lot of the different counterparts right now too. So, the landlords, employees, physicians, you know, who may need to give concessions for a workable
structure may have trouble doing that. They have a little bit less flexibility than they might otherwise because they themselves are struggling. So, you know, I think the biggest thing you can do is try to make sure that you’re putting processes in place to both move forward with a potential sale or financing to deal with the distress situation, but also to limit your downside,
like processes protection here, and having folks come in and take a look at the situation early could be very useful. There’s been more than a couple situations in recent. We swear, you know,
the initial situation is pretty grim and then, you know, when you kind of unpack it a little bit,
you see that there are levers to conserve cash, advantage, payment, timing and ultimately maximize optionality. But you’re going to want to do that in a way, and I think others had mentioned where you have their communication channels and it’s also clear, you know, that the sponsor is a sponsor and the company is the company. In that way, you know, I think particularly now, where you see a lot of sponsors with late stage positions, hopefully, they’ve been able to
get out most of the capital they put in or already realize a return. You want to make sure that
you’re setting up a process that doesn’t put funds already received at risk. So, you know, the I think its spokesman of the consequences for not dealing with the process, effective can
involve … back, and then I think additionally right now, it was mentioned previously, you have even more potential for problems when you’re delaying taxes and things of that nature, because then directors and officers can, if funds ultimately aren’t made available for those payments, directors and officers could be personally liable in certain situations. I think when you think about sponsors looking at a business and being part of the financing solution right now, that could be attractive, and the key there is to make sure that your structuring it in a way that gives them a leg up in the capital structure in the downside scenario. So, I think Seth mentioned earlier,
but simply writing another equity check is probably going to be a tough pill to swallow a lot of times, so you might try to do something like a priming lone, but obviously, that requires your lenders to get on board, and they may be reticent to give up their position of the current environment, particularly if your business might be asset light. But we are seeing lenders and sponsors willing to pair up, share the pain, enter into perry loans for the business preferred equity structures, convertible loans, hold co debt that structurally subordinated existing… all options where the, you know, sponsor can kind of keep control, to Peter’s points and manage through the current situation, hopefully for something of once we’re through this, that allows them to get a better evaluation on the company on the backhand.

Hey Brad.


These situations to me are all very bespoke and situation, in fact, a specific because supposed to any lenders or doing a one size fits all approach. Would love your reaction to that.

Yeah, totally. I totally agree. I think it depends. A lot of lenders have a lot of, you know, as I was saying, stress in their portfolio, depending on, you know, what they’re going through, its, I think, driving their reaction to the different needs of their credits. And I think often, it’s complicated
because a lot of the lenders, if they’re trying to fill a hole that you need, they want to see that kind of shared sacrifice and sure pain, and you kind of have to deal with the situation and other counter parties you have on the ground and other, you know, demands on the business, kind of all as one collective work out, as opposed to, you know, a series of individual transactions.
So, I agree it makes it pretty fluid in terms of how they’re approaching it.

It’s the sponsor that really has to drive this, right, because the lender, sitting on presumably mount debt above the equity, they’d love to see the sponsor keep writing checks beneath them,
and they’d like to keep the sponsor on a short leash. You know, a month, two months, three months, you know, extensions, and you know, the sponsor usually ought to be thinking about
how to get a global solution here, to the sponsor’s advantage and take advantage of the situation.

Yeah, I agree. And I think that we’ve seen a lot of instances over not just how, but in the past, where, an amendment seems really good. You know, it gives you a couple of months and then
you’re a couple months down the road and you find out a lot of leverage is gone. Right? So, kind of thinking, long term, thinking strategically about where you ultimately want to go and whether or not, you know, whatever being put in front of you is going to help you get there is important.

Thanks, Brad. Just as a follow up to Bob’s comment about deal terms and, kind of, the new normal, I’d like to follow up with Mark and Seth on just deal terms you’re seeing with respect to any deals you’re doing. Are there specific … outs? What’s happening with the wexham warranty insurance, which was a very active market before? How is that being handled, but respect to COVID, their exclusions with respect to COVID. I’m curious from Mark and Seth’s perspectives since you guys on the front line of mergers and acquisitions. What you guys were saying.

Sure, I’ll go first Seth. You know, I think on the record for the insurance there are some
COVID 19 exclusions that are starting to creep into discussions somewhere in some
just got pushed back up on. So, I think that’s one to be characteristic. I think me and other materially standards have an enhanced needing in this environment, depending on how much business is actually impacted that we’re talking about. So, we’re seeing some more creative
things around that, and maybe even lower standards than MAE are starting to creep in the discussion because people don’t want by a falling knife. Right? But I think where we are today,
if you go back to the pre COVID period, a lot of retail, multi-site … got shut down, or kind impacted, if you kind of know the impact today, as we sit here, I think the big question is what’s the rampant- What’s the duration of this and how long were you in the spot? And then, what does the ramp look like? And I think the less, with the more surfing, you can do around planning,
which a plan is the consumer preferences and a reasonable ramp. I think people will do things early in the cycle versus later. But in states that are opening up, their certainly like to surgeries tomorrow. And so, we’re starting to see the ramp. Some multi-site and even dental losses that had
full schedules booked months out, we kind of took a six-week hiatus here. Well, in states that are opening, those books and schedules are getting confirmed this week for next week. And so I think some of these sectors are going return a little bit faster than people think is the worst case scenario, and I think the question is, how high is the ball going to bounce? But in terms of the deal structures, people are trying to deal with the uncertainty in new ways and these are, look, these are unprecedented discussions, right? We’ve never, even in a recession, you didn’t talk about these, kind of, COVID 19 kind of provisions. So, I’m going to stop there and kick it over to Seth.

Yeah, no, I agree with that. I mean, from a revenue warranty perspective, similar to what Mark said, I think it’s been pretty friendly in our experience… it’s not crazy. It is getting, you know, aggressively negotiated around, obviously, and I mean, we’re sensitive. To, on the buy side you don’t want to have walked right because when they woke up, COVID was more serious than you thought it was so that’s the only thing that that I have seen that I thought, I spent this
much time negotiating in offering… governance, it’s big because obviously, on the on the sell side they need to be able to comply with federal and state laws and regulations, but, you know,
if they decide they want rip 100 people, that’s kind of a problem with that, talking to us first. So, I would say there’s a lot of more time to spent around that around that … as well. But I would also actually just, you know, unrelated, …, I mean, some of this feels almost nothing there, but
it’s been six weeks, but it feels like it’s been a year. People are still kind of negotiating these provisions like shutdowns just happened, when in reality we’re already starting to send… we have a diagnostic imaging business, and we’re already starting to see increasing volumes. Even upstate home orders haven’t been lifted just because the team has been able to figure out current … and figure out how to continue to grow, but they’re not anywhere near what they were in January and February, but still it’s not, you’re already starting to see that lift, and I think most of the stuff like there’s only so long you can really you know, you can extend without, you know, getting, you know, chemo treatment, or you go to the doctor or you go to the dentist at some point. So, I think with some of that I think you’re going to see it start seeing lighting
up just as the stay home orders start getting to be rescinded. It almost feels faded already.

I appreciate that. Seth and Mark and I really want to thank all the Panelists. I’ll turn it to Jerry Sokol for closing commentary.

Thank you, Fred. First of all, I really want to thank all of our panelists. We’re really fortunate to have such great relationships and such great partnerships with experienced professionals in
the distressed space with whom we work, both advising clients that are dealing with some of
the district issues and also working with sponsors as they look at the various investments and, you know, clearly, these are different times, and a lot of what we’re looking at and what we’re doing is certainly different than what it was before. So again, thank you very much to our faculty for putting on a terrific program. I want to thank all of our attendees for coming. We really appreciate it. We appreciate you putting your time into listening to what we are presenting.
And I hope everyone has a great rest of your afternoon. Thank you very much. Bye now.


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