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0:58

I'd like to start today by welcoming Andrea

1:00

Kuya and Claire Moylan to today's podcast.

1:03

My name is DKA Stack and I am Vice

1:06

Chair of Education in ALA's

1:08

Business Law and Governance Practice Group. My

1:11

consulting practice advisors on finance, valuation

1:13

and transaction matters. So I'm really looking

1:16

forward to talking to Andrea and Claire about distressed

1:18

healthcare transactions. Andrea

1:21

and Claire presented about this at last year's

1:23

a HL Aran Healthcare Transactions Conference.

1:26

Um, so the BLG Practice Group invited them

1:28

to continue that conversation today. So

1:31

before we get into it, I'm gonna ask

1:33

Claire , Andrea, will you each introduce yourselves?

1:36

Sure. Hi, <laugh> . It's great to be here with

1:39

you and , um, great to see you again. Um,

1:42

Andrea. Um, I'm

1:44

Claire Moylan. I'm a principal and co-founder of

1:46

Gibbons Advisors. We specialize in middle market

1:49

healthcare restructuring and consulting.

1:52

Um, we cover the national

1:55

practice , um, but we're headquartered in Nashville.

2:00

Hi. Um, thanks Jessica and Claire. Always

2:02

great to see you again and work with you. Um,

2:05

my name's Andrea Kya . I'm a partner at

2:07

k and l Gates. Um, I do healthcare

2:10

mergers and acquisitions, but am a recovering

2:12

bankruptcy attorney. So constantly

2:15

find myself in this mix between distress

2:17

healthcare transactions. Great.

2:21

Welcome. Um, so just to kick it off,

2:24

we're talking about distress transactions.

2:26

So just to sort of lay the foundation , um,

2:28

can you expand on what you mean when

2:31

you say distress transaction and maybe

2:33

give a couple examples?

2:35

Yeah, sure. I'll take that one. Um, so

2:38

when we're talking about distressed transactions , um,

2:41

hopefully it's not the people in distress, though

2:43

many times the people are in distress, <laugh>

2:45

. Um, we're talking about the businesses

2:47

being in distress. Um, in

2:50

a bankruptcy scenario that's pretty obvious. You

2:52

know, you've got a , a business that's failed and

2:54

it's going through a bankruptcy process and a

2:56

transaction. Um, most

2:59

of the time from what we've experienced,

3:02

a transactions part of that, it's section 360

3:05

3 sale or other. Um, but

3:07

outside of the bankruptcy court , um,

3:10

there are other sales , uh,

3:12

other transactions that take place. Um,

3:15

in cases where you might have a shortage of liquidity,

3:18

you might have , uh, the equity completely

3:20

wiped out by debt. Um,

3:22

so it's different dynamic there

3:25

when you're trying to sell the business where you've got different

3:27

stakeholders involved. Um,

3:30

a transaction in, in my mind also

3:32

includes when it's not necessarily a sale of

3:34

assets, but it could be a settlement of

3:37

claims or liabilities that enable

3:39

the business to continue

3:41

without those liabilities moving

3:43

forward. And the type

3:45

of buyers and , um, and

3:47

players in a distressed transaction are

3:49

typically a little different than what

3:52

you'll find in a , a strong performing

3:55

business. The market is a little different.

3:57

There's still a structured process , um,

4:00

but the, the lenders, the

4:02

people that lend into a distressed sit situation,

4:05

the buyers that are attracted to distressed businesses

4:07

can be a little different. So , um,

4:10

when we're talking about distressed transactions,

4:12

we're talking about those types of things. Shortage

4:14

of liquidity , um, where

4:17

there's no equity left where you're

4:19

in bankruptcy. And , um,

4:21

and the , the stakeholders , um,

4:24

and the players involved are a little different that

4:26

help you get to get to the solution and get something

4:28

over the line.

4:31

Got it. And I think in the

4:33

presentation you gave last year, you talked about the

4:36

increase in this activity. Um, can

4:38

you expand on what you think is driving

4:41

the distress in healthcare?

4:44

Yeah, I will. Um, so what

4:46

we're talking about today , um, is

4:49

more on the healthcare services

4:52

businesses , um, more so than

4:55

other aspects of healthcare like pharmacy

4:58

, um, and , um,

5:01

and medical equipment. If we focus more

5:03

on the healthcare services businesses like

5:05

hospitals, nursing homes, senior

5:07

living, hospice, home

5:10

healthcare , um, those types of businesses, the

5:13

drivers , um, are

5:16

numerous. And it's a very difficult market at

5:18

the moment , um, for providers and,

5:21

and everybody actually. Um, that

5:24

said, it's not all doom and gloom. There

5:26

are , um, changes

5:29

and whenever there's big changes in a

5:31

sector, there's opportunities for some and

5:33

there are headwinds for others. Um,

5:35

but I'll just go through some quickly 'cause we

5:37

could spend a whole hour talking about this <laugh> . Um,

5:40

yeah , so on the capital market side, the interest

5:42

rate environments made things very difficult. Not

5:45

only affecting cash flow when you've

5:47

got the floating rate exposure, but also

5:50

valuations and ability to get

5:52

financing for a transaction. Um,

5:55

the thresholds have got more difficult

5:57

in this interest rate environment. There

5:59

might be hope on the horizon in the second half

6:01

of 2024, what people are

6:04

expecting. Um , but for now it's

6:06

a , it's a tough environment. Um,

6:09

there's been fewer m and a deals as

6:11

well, and we'll maybe come back to that. Um,

6:14

there's increased , um,

6:17

antitrust emphasis. So

6:19

that's put , um, another layer

6:22

of , um, of

6:24

potential barriers for some strategic

6:28

large strategic transactions. Um,

6:31

labor and cost supply . Supply

6:34

cost pressures have been massive the past few

6:36

years. Um, that's going to continue

6:39

, um, maybe not increasing at

6:41

the same rates as it did through

6:43

, um, the backend of, of the

6:46

pandemic, but it's definitely set

6:48

a new baseline. It's not going to get cheaper.

6:50

It might just slow down getting more expensive.

6:53

Um, but on the other side, on the revenue side,

6:56

the , the rates haven't gone up

6:58

at the same rate as the cost . So there's

7:01

a margin squeeze. And I think there's

7:03

a big question in everyone's mind

7:05

and maybe a realization that the margins

7:07

that you could get in

7:09

healthcare pre covid may

7:12

be gone forever. It may be just the

7:14

margins are, are lower , um, for

7:16

the foreseeable future. And that impacts

7:20

businesses when they've got a , a capital structure

7:22

and a debt structure that's based on expected

7:25

returns that maybe you just

7:27

won't be able to get anymore . Um,

7:30

other aspects , um, on drivers,

7:33

I don't, I haven't seen this play out yet, but I

7:35

think it's something to watch is the unwinding

7:38

of Medicaid continuous enrollment.

7:41

So through the pandemic , um, the

7:43

government allowed people to stay on Medicaid

7:45

if they qualified for Medicaid and not have

7:47

to re-enroll, but through 2023

7:51

from May, that

7:53

was unwound. So every state is going

7:55

through a process of everybody having to re-enroll

7:58

in Medicaid. And already

8:00

as of the middle of January , um, 15

8:03

million people were dis-enrolled from

8:06

Medicaid because they no longer qualified. So

8:08

the impact of that on providers , um,

8:11

I think will start to see this

8:14

year. It won't happen immediately, but as those

8:16

people need healthcare , and then if

8:18

they're not insured with Medicaid and

8:20

they don't have other insurance , um, that'll

8:22

start to pinch. It's a , it's a massive number

8:26

and every state's not impacted the

8:28

same. Some states are more , uh,

8:31

impacted by that than others. Um,

8:33

and then the last thing is the macroeconomic

8:37

shift, which has been coming

8:39

for as long as I've been in healthcare

8:41

about 20 years. Um, moving

8:44

out of hospital and out of an institutional

8:46

setting into a community-based setting. And

8:49

the pandemic really helped to accelerate

8:51

that. But businesses that

8:53

haven't , um, transformed

8:55

their care to be able to take advantage of

8:58

that trend. And they're left with a legacy infrastructure

9:01

that's not fit for purpose, that's bigger than

9:03

what they need, and that's expensive to , um,

9:06

keep in good order, they're really going

9:09

to continue to suffer. On the other

9:11

side though, there's the opportunity of

9:13

who's getting that business. So ambulatory

9:15

surgery centers and, and others that

9:18

have got that model , um, that

9:20

that's where the care is moving to. Um,

9:23

so there's opportunity at the

9:25

same time in the same token as we talk about challenges.

9:29

Got it. Okay. So there's a lot going on

9:31

that's pushing people to sell

9:34

or do a transaction. Um, and

9:36

in that there's a subset that are truly distressed

9:38

when they enter that process. So they didn't , they need

9:41

to jump on the first wave or get

9:43

into it early. Um, so Andrea, I'm

9:45

gonna turn over to you for a moment. And can you talk

9:47

about what makes the distress

9:49

transaction different than one

9:52

might enter into the transaction space

9:54

for some of these reasons, but in a different way because

9:56

it's what we're calling distress

9:59

today. Right.

10:01

And as Claire mentioned, I usually, when you have

10:03

a distressed company, you have a company that's

10:05

facing liquidity issues. They may be having

10:08

problems making payroll , um,

10:10

they've probably delayed payments to unsecured

10:13

creditors. Um, they're probably negotiating

10:15

with their lenders. There's a

10:18

lot usually going on at the company

10:20

where funds are needed. Um,

10:23

and as Claire just mentioned as well, access

10:25

to cash is not as easy these days.

10:28

So , um, you really have this

10:30

tight timeline of can

10:33

we make this company work? Um,

10:35

and if so, you know, finding a

10:37

buyer on this compressed timeline. So

10:40

usually that is

10:42

difficult on the seller side because they're

10:44

forced to find a buyer quickly

10:47

or a strategic partner quickly negotiate

10:50

with lenders and, and they're trying to also operate

10:52

a business. Right? But you also have the

10:55

pressure on a buyer to be able to come in

10:57

due diligence quickly. Usually they're,

10:59

they're essentially stepping into the company. So

11:03

a lot of these are stock deals or

11:05

, um, it's a little more difficult

11:07

in healthcare to do an asset transaction outta bankruptcy

11:09

, um, with payer agreements and

11:11

, and non liability of certain contracts.

11:14

So you see a lot of them being stock

11:16

transactions , um, merger agreements.

11:19

And so you're essentially stepping into all

11:21

of the liabilities of a company and you have this

11:23

tight timeline to due diligence

11:25

to figure out what are those risks, what

11:28

are you stepping into, what are you inheriting?

11:31

Um, and trying to build all of that into

11:33

a purchase price for a value proposition

11:36

of, you know, what are you going to assume

11:38

as liabilities? What are you paying in cash?

11:42

Um, who are the different constituents that you're

11:44

negotiating with? Is there lender

11:46

debt? If so , um, if they can't

11:48

be paid in full, is the lender taking a

11:50

haircut? If so, you

11:52

know, what are they willing to do? A

11:54

lot of the times, and we've seen recently, lenders

11:57

being more proactive and more involved

11:59

in these negotiations, oftentimes

12:02

even replacing entire boards.

12:05

Um, so you're trying to figure out who you're

12:07

negotiating with , um, and you're also

12:09

trying to figure out what you're

12:11

pricing this, you know, proposition

12:14

for, for this acquisition, but

12:16

on a very tight timeline where you don't

12:19

really have recourse. So

12:21

you have a company that's failing. You would typically

12:24

do things like have indemnification,

12:26

you'd potentially have escrows to

12:28

backstop reps and warranties. Usually

12:31

in these situations you get very minimal

12:33

reps and warranties. Um, you're

12:36

stepping into whatever you're stepping in, you just need

12:38

to figure out what that is and you need to figure

12:40

it out quickly. Um, and

12:43

you don't typically have the escrows

12:45

, um, that you would normally have for

12:47

a year or two to back your up some

12:49

warranties. So it really

12:52

puts a lot of pressure on the buyer and the buyer's

12:54

advisors to be able to determine what

12:57

is going on with this company very quickly. What

13:00

are the biggest risks, how exactly if

13:02

there are risks, do we mitigate them? Um,

13:05

especially in healthcare where you had , you

13:07

know, potentially healthcare fraud and other things that

13:09

carry over , um, with Medicare

13:12

and payer agreements and billing audits,

13:14

you don't, don't have time typically to do

13:16

billing audits and coding audits. Um,

13:19

so it's just a matter of really

13:21

relying on your advisors

13:23

to determine what those risks are,

13:25

making sure you're not stepping into something that you

13:28

haven't built into the price that

13:30

you're paying for this company.

13:33

I think as well , um, the

13:36

healthcare overlay on all of, I

13:38

agree with everything that, that Andrea was saying, but

13:41

when you've also got the healthcare overlay,

13:44

it's not like we've got a , a factory where

13:46

the product just stays in the factory while

13:48

we sort out the transaction. Um,

13:51

it's, it's a people business. You've

13:53

got physicians, you've got patients,

13:56

and you've got staff and

13:58

those PE people have choices and

14:00

they can go elsewhere. Um,

14:02

and the community in , in

14:04

a lot of the hospital cases, we , um,

14:07

we have, have a massive interest

14:10

in wanting to see what's

14:12

the future of that, that hospital. Um,

14:15

so while you've got

14:17

the, the transaction logistics

14:20

to manage as well on getting the , the

14:22

buyer lined up , um, on the,

14:24

on the seller side , um, you've

14:27

gotta also keep everything , um,

14:30

held together to actually

14:32

make it through to a transaction without losing

14:35

your physicians, losing your key

14:37

staff members, losing your , um, your

14:40

key people in the leadership team, patients

14:43

deciding to go elsewhere. Um, so there's

14:45

a whole stakeholder engagement , um,

14:48

aspect of, of healthcare , um,

14:50

which I think is a bit different

14:52

to other types of sectors when you're dealing with

14:55

distressed transactions.

14:57

Of course, for sure. Um, and

14:59

are there any examples that you wanna share where

15:02

you address some of these risks? We don't have

15:04

to cover all of them , hopefully not

15:06

every transaction you do has the whole laundry list

15:09

of distress. Um , but

15:11

are there any maybe within the past year or two that you've

15:13

seen that you wanna speak about? Yeah,

15:17

so , um, there's

15:19

definitely always risks , uh, that

15:21

come in these transactions. And there's always the

15:23

fear of the unknown, but then there's also the

15:25

known, right? And there's the things of how

15:28

do you mitigate the known. And

15:30

so we had a company who was doing

15:32

really well during covid , um, as

15:34

a lot of companies did, and ended

15:37

up distributing out to all

15:39

of their investors a significant amount of cash,

15:41

not keeping reserves. And then

15:44

a year later, suddenly financial difficulties

15:46

hit , um, with all the market conditions

15:49

Claire is talking about. And the company

15:51

immediately went into distress, immediately

15:53

went into marketing for a quick sale.

15:56

And one of the biggest issues was

15:58

this had to be a merger transaction,

16:01

so stepping into all the liabilities, and

16:04

there was a lot of concern on the

16:06

buyer side of, you know,

16:08

what is that the risk for the directors

16:10

and officers, because that risk is essentially

16:13

being inherited. And when

16:15

you're wiping out equity in a merger

16:17

transaction and they're getting minimal amounts

16:20

back, a lot of the times stockholders

16:23

can just become litigious. And this was

16:25

a very significant cap table, a lot of stockholders,

16:28

a lot of , um, well off stockholders

16:30

who had those funds. So

16:33

we didn't want, as a buyer representing the

16:35

buyer for them to step into that liability

16:37

of, you know, immediately a director and officer liability

16:40

suit with the DNO policy that

16:43

had bankruptcy exclusions. Um,

16:45

we were trying to do this outside of bankruptcy,

16:48

so we were trying to, you know, keep

16:50

the, the policy in place by

16:52

a tail policy, but also had

16:55

to go out and get releases from every

16:57

single director and officer , um,

16:59

which is not an easy thing to do when they

17:02

are very concerned about their own

17:04

liability as well, and the decision

17:07

making they did. But we ended up getting all

17:09

of the releases. Our client was very clear

17:11

they were not buying this company without them. Um,

17:14

and then the company ended up reserving

17:16

funds and purchasing an extra tail policy

17:18

, um, to cover them

17:20

. But, you know, as a buyer, we

17:22

just couldn't walk into potentially,

17:25

you know, a hundred million dollar liability of

17:27

funds that were distributed. So that

17:30

was probably one of the bigger ones. <laugh> .

17:32

Yeah, right. Gosh, I've

17:34

got some other , um, examples

17:37

of risks that we've

17:40

kind of learned from , um, and

17:42

will we'll make sure we incorporate in

17:44

our , um, in our future , um,

17:48

businesses , uh, future transactions.

17:50

So one of the cases we did , um,

17:53

was a , a business that was

17:55

, um, on

17:58

the brink of closing , um, pre-bankruptcy.

18:01

So it was a , a bit of a free

18:04

fall filing. Um, the, the CEO

18:06

had died, and then the

18:08

incoming CEO , um, which

18:11

was his wife died of

18:13

, um, COVID shortly after. I

18:16

mean, it was a terrible situation. And

18:18

, um, so we got a

18:21

appointed as the financial advisor for

18:23

the debtor, and , um, ran

18:26

a quick process to have

18:29

a bankruptcy auction. The

18:31

auction was successful and , um,

18:35

and there was a winner,

18:37

but the winner just disappeared

18:41

days after the transaction couldn't

18:43

be contacted, was obviously

18:45

not going to , um, come

18:48

through with the deal that they had agreed to

18:50

, um, at the auction. So

18:53

fortunately we did have a backup bidder, which

18:56

is, which is pretty typical. So I just wanna

18:58

make sure everybody, make sure you have your backup bidder

19:00

because you can't be relying on the, the

19:03

first bidder. Um, and

19:05

, um, and in

19:07

healthcare you don't close

19:10

the transaction immediately after

19:12

having the auction because there's all of

19:14

the transfers of licenses and , um,

19:17

and all those agreements, which can take months, even

19:19

years to, to have that all

19:22

, um, go through the government process. So

19:25

, um, what

19:27

ended up happening in this case is that it was

19:29

nine months down the road before

19:32

it was due to close , and

19:34

the business continued to lose money.

19:36

It was losing money before the transaction.

19:39

The buyer was aware of that, it continued

19:41

to lose money, and maybe they didn't do the due

19:44

diligence like , um, like

19:46

Andrea would recommend, and

19:49

, um, it was losing

19:51

more money than they expected. So by the

19:53

time it comes to closing

19:55

on the transaction, they wanna retrade,

19:57

you know, they think, well, I'm not paying the same

20:00

amount that I committed to nine months

20:02

ago. This is a disaster company,

20:04

and I don't, I don't think it's worth it that anymore.

20:07

Well, nine months down the road, the

20:10

third and fourth bidders, they're long gone.

20:12

You know, they've moved on to other things and they're not

20:14

in the market necessarily for this anymore. And

20:17

plus the business is not doing

20:19

well, so maybe they're not even interested. So

20:21

then you're facing , uh, uh,

20:23

dealing with one party and , and trying

20:26

to negotiate with one party and one buyer,

20:28

and you know, what the balance of power is, they're

20:31

very difficult to try and get something

20:33

over the line when you've only got one person

20:35

interested in the , in the assets.

20:38

So it happens frequently

20:41

, um, particularly in the

20:43

type of , um, um, in the middle

20:45

market where you don't have always

20:48

the most attractive assets coming through and,

20:50

and people aren't jumping at <laugh>

20:52

, they're not lining up to buy some of

20:54

these assets. You've got part , you've

20:56

got parties that are , um, have

20:59

a unique interest in it, and for some reason, you

21:01

know , they've got the ability to make it work, whereas not

21:03

everybody can. So

21:06

the retrade risk is something that's,

21:09

that's very real and it makes an

21:11

enormous difference , um, for

21:13

the outcome of the case. So trying

21:16

to design the process so that you've got

21:18

a competitive process and you , um,

21:23

takes steps to tie in the

21:25

buyer and, and get deposits

21:27

and, and have them , um, really

21:30

committed to the, to the

21:32

deal , um, to mitigate that ability

21:34

for them to retrade down the line is

21:36

, um, is something that I'd really recommend.

21:40

Well , we're talking about bids and the types of

21:42

buyers you mentioned , um, some

21:45

buyers have that specific interest, which is

21:47

why they're willing to take on some

21:49

of these risks or enter into this distress.

21:52

Is there any particular

21:54

group or different characteristics

21:56

of buyers that you see , um, to

21:59

be, whether it's typical or maybe

22:01

in the current market willing to

22:03

enter? Um, or is it really case

22:06

specific based on the , um, what's

22:08

for sale? Like

22:12

, I don't know , Claire , if you wanna orient

22:14

Andrea <laugh> , take a swing on what

22:16

you're saying .

22:18

Are there typical buyers? That's the

22:20

question. Are

22:20

You seeing like a consistent buyer type is

22:23

I guess one way you could look at

22:25

it? Or are there certain characteristics

22:27

across the different fire types that

22:30

are entering?

22:32

Um, It

22:34

, it depends what the type of the asset and

22:37

whether the assets a potential , um,

22:41

platform , um, deal

22:43

for someone or it's something that they can easily

22:45

bolt on to an existing platform.

22:49

Um, if we take the example of a

22:51

a community hospital , um,

22:55

the strategic, the strategic

22:57

buyers are going to be larger regional

22:59

systems , um, but

23:03

the hospitals aren't always bought by strategic

23:05

buyers. Um, we had

23:07

a case , uh, last

23:10

year or the year before where it was

23:12

a community hospital that couldn't

23:14

make ends meet, and all

23:17

of the strategic buyers in

23:19

the market were interested, but

23:21

they wanted to close inpatient services and

23:24

create a new outpatient facility

23:26

for this community. And

23:29

the community didn't want that. They really wanted

23:32

to have inpatient services, so they ended

23:34

up , um, agreeing to sell the hospital

23:37

to a non-strategic buyer . And

23:39

, um, and that enabled them to,

23:42

to keep the inpatient services. But

23:44

you don't have that kind of hub

23:47

and spoke , um, model happening

23:49

in that market. I'm still not convinced

23:52

whether that that

23:54

will , um, not still end up happening

23:56

one day. Um, but for the time being,

23:58

that was the solution that that was , um,

24:01

the community wanted at that time. So,

24:04

so you always think it's gonna be

24:06

a strategic buyer because they can make

24:08

more out of it than a

24:11

non-strategic buyer, but it , it's

24:13

not always the case that, that the strategics

24:15

win.

24:18

Interesting. Yeah,

24:20

I think that that's what makes healthcare transactions,

24:23

you know, unique, especially in those community

24:26

situations where you have these other

24:28

third parties where , um,

24:31

you know, you have community healthcare services

24:33

you're providing to them, right? So that's very

24:35

personal to a community. Um, and

24:38

that personal, you know, community

24:40

feel versus what financially makes

24:43

sense don't always align. So,

24:45

you know, closing OB services is

24:48

always a big dispute in these hospitals

24:50

because it's very expensive. It's one of

24:52

their highest, you know, liabilities and,

24:55

you know, people wanna give birth in

24:57

their community and they want those services available.

25:00

But, you know, when hospitals are

25:02

considering, you know, all the financial economics

25:05

that Claire was discussing and, you know,

25:07

determining where to cut costs , um, sometimes

25:10

it's cutting lines of service that people in the community

25:12

really want. It's really hard

25:14

to find a buyer , um, who

25:16

can figure out and do exactly

25:19

what that buyer did , which is keep

25:21

all the services in place , um,

25:23

but also keep the facility opening

25:25

and running. And we'll see, I guess how that

25:27

works out long term . Like Claire said , um,

25:30

obviously cutting physician compensation

25:33

obvious is also on the top of the list

25:35

of heavily negotiated things. Um,

25:38

so it , it definitely makes healthcare unique

25:41

compared to other , um, service line

25:43

. Yeah. I'm

25:45

gonna shift gears a little bit. Um, we've

25:48

talked from the beginning about different financial

25:50

stresses. Um, in what cases

25:53

or examples, where have you seen

25:55

bankruptcy , um, as

25:58

the solution or an effective tool rather, to

26:02

ultimately have the best

26:05

outcome for the situation at hand?

26:08

Um , I'll take that one. There's , um, there's

26:11

a case that , um, we

26:13

, um, we weren't on

26:15

the debtor or the, or the credit aside. Um,

26:18

in this case we had a little bit of an

26:20

involvement, but, but , um, I

26:22

watched from afar and was

26:24

pleased to see the outcome . So the

26:27

case , um, is Borrego

26:29

Community Health Foundation in California.

26:32

That company had a

26:34

, um, a historical , um,

26:37

fraud and they

26:39

changed their board and they had

26:42

taken measures to , um, to

26:46

prevent it from happening. Um,

26:49

but there were still issues for , for

26:51

some reason. Um, the department

26:53

of , um, health and care services

26:56

in California decided to suspend payments

26:59

of Medi-Cal for Medi-Cal, and

27:01

this provider is a nonprofit and

27:05

primarily served a Medicaid population.

27:07

So cutting those payments would

27:10

mean an immediate closure of

27:12

the, of the whole operation, which was pretty

27:14

sizable and served a rural community.

27:17

Um, so in that case, the

27:20

, um, the debtor filed

27:22

bankruptcy and was able to

27:24

use the bankruptcy process and

27:26

the automatic stay , um, to

27:29

, um, to stop the suspension

27:31

of those , um, Medi-Cal payments. And

27:34

the reason I chose this one to talk about

27:36

is because they , um, have

27:39

just , um, submitted

27:41

the plan and I think agreed the plan in

27:43

January this year , um, which

27:46

, um, solidified,

27:48

you know, they had a , a very successful sale.

27:51

Um, they were able to settle the

27:54

claims with the Department of Health and

27:57

care services, pay all the secured

27:59

creditors, and also , um, have

28:02

a plan which would provide for a 100%

28:04

return to general unsecured. So

28:07

that's a , um, incredible

28:09

outcome , um, for a

28:12

community that really needed these

28:14

essential services , um,

28:16

essential healthcare services for

28:19

a rural and very , um, low

28:21

socioeconomic community. And

28:24

if that hadn't happened, the outcome

28:26

would've been closure and , and a scrambling

28:29

to try and , um, find other providers

28:32

to , to deliver those services.

28:34

And at the time, the analysis was

28:36

that they just weren't, they weren't providers

28:38

in the market to be able to do it. So that

28:41

in that case, the automatic

28:43

stay in bankruptcy and the ability

28:45

to use the , the jurisdiction of the bankruptcy

28:48

court to have as the forum

28:50

for dealing with the government liabilities was

28:53

, uh, extremely effective. And

28:55

I think the, the , the outcome

28:58

for patients and for , um,

29:01

for that business at , at this

29:03

stage looks extremely positive. Can

29:07

you think of any other examples, Andrea, where

29:09

bankruptcies been an effective tool

29:12

in your experience?

29:14

Yeah, so the

29:16

biggest thing for healthcare

29:19

is the , the nons assignability of

29:21

payer contracts. And now there's

29:23

essentially this evolving case

29:25

law out of Delaware that is essentially

29:28

saying, not only can

29:30

you force the assignment of these payer contracts

29:32

, um, which we've all assumed

29:35

is, you know, you're taking all of the liabilities,

29:37

especially with Medicare and with companies

29:39

that, you know, especially the

29:41

lab business, you know, had a

29:43

, a lot of closures because a lot of

29:45

the fraud and , and people couldn't take over

29:47

those businesses because they, they couldn't take those payer

29:50

contracts. And so a lot of

29:52

the times if there's, you know, historical

29:55

billing issues , um, you have

29:57

a facility's that risk because

30:00

you , no one's gonna step into those Medicare liabilities.

30:02

And Medicare historically has not been willing to

30:04

negotiate those. And so now

30:07

you have this, this case law coming

30:09

out that's saying, well, we

30:11

don't think that this is an executory contract where

30:14

you actually have to essentially

30:16

cure, which is pay whatever liabilities

30:19

are on that contract to assign it , um,

30:21

or step into that liability. But

30:23

we think that these are actually statutory entitlements.

30:26

And so in that case, these

30:28

are just assets that can be sold like

30:30

any other assets. And so you don't have to

30:33

cure those liabilities. So essentially

30:35

you're taking a Medicare agreement

30:38

, um, and you

30:41

aren't taking on those liabilities, which

30:43

for a lot of facilities has been

30:46

a huge issue. And, you know, I was in-house

30:48

at a company, I filed bankruptcy

30:50

, um, and that was,

30:52

that was the biggest problem. Nobody was going

30:55

to take over the healthcare company with

30:58

the liabilities that they had with their

31:00

payers. Um, and had they

31:02

, had they been able to take over those

31:05

contracts free and clear, without those liabilities

31:07

, um, those facilities would still

31:09

be open. And if

31:12

they're not using the bankruptcy

31:14

process , um, are

31:17

there other options or what risks would

31:20

there be if these similar sellers

31:22

weren't going through that process if

31:24

they tried to do

31:27

their transaction without those protections?

31:31

Yeah. And , and so that, that adds some risks

31:33

, right? Bankruptcy gives you a lot

31:35

of finality. Um, it , it allows

31:37

you to have an order that says these things are

31:39

free and clear. You know exactly what the cure

31:41

amounts, if you're taking over certain executory

31:44

contracts , um, you mostly know the liabilities

31:47

have been disclosed , uh, so

31:49

you have a lot more information,

31:52

a lot more guarantees. And then you have a sale

31:54

order that says you've now purchased these assets

31:56

free and clear based upon the purchase price, and

31:58

those proceeds will attach , um, the

32:01

liens will attach to the proceeds of the sale, so

32:03

that that is not something you're

32:05

gonna get outside of bankruptcy. Um, and so

32:08

you have to figure out exactly

32:10

what those liabilities are. Um,

32:13

and you're also buying a

32:15

company most likely at a depressed price

32:17

because it's, you know, distressed

32:20

and you have a lot of creditors

32:22

that might not get paid , um, unhappy

32:25

shareholders who aren't getting paid.

32:28

Uh, so you have fraudulent transfer risk

32:30

. And so trying to determine

32:33

what that proper purchase price

32:35

is , um, knowing that

32:37

that is a potential issue of

32:39

unhappy constituents at the end of

32:41

the day, at the end of this transaction when you close and

32:43

not stepping into those liabilities is

32:46

one of the biggest issues. And so a

32:48

lot of the times you don't have time

32:50

for a fair market value opinion. You have to do the

32:52

best you can to document what that

32:54

value is. Um, a lot of the times

32:57

we get either a broker

32:59

price opinion, we get some type of opinion

33:01

from essentially a

33:03

banker on the marketing process, how those assets

33:06

were marketed, who they were marketed to

33:08

, um, the timeframe from

33:10

which they were marketed. Uh, and

33:12

you just have to do the best you can to mitigate

33:15

that fraudulent transfer risk. If somebody comes

33:17

in and says, we think that you did

33:19

not pay enough for this company , um, you

33:22

underpaid for these assets, or, you

33:24

know, the , the stock that you bought for this company , um,

33:28

and mitigate those risks. And we, we've

33:30

seen a lot of people becoming more litigious

33:32

about that , uh, with

33:34

buyers and these, you know, essentially

33:37

fire sales , um, for lack of a better

33:39

word,

33:41

When time, like it must be hard , um,

33:43

Andre , because when time is of the essence, you

33:46

know, you've got liquidity and you're just trying

33:48

to make it over the line to a transaction, the

33:51

, the choice might be, you

33:54

know, you take the deal that's in front of you or

33:56

the place closes, and

33:59

then after the fact having a challenge that

34:01

says, oh, well you didn't get fair value,

34:04

and you think, well, the conditions

34:06

really didn't provide the time for

34:09

a very robust marketing. I mean,

34:12

no one was willing to fund the

34:14

transaction process, the marketing process

34:16

to actually have

34:18

that happen. So pretty challenging,

34:21

I guess, to prove when

34:23

you've , um, got a

34:25

whole lot of , um, stuff flying

34:27

in the air and you're just trying to get something over

34:30

the line ,

34:31

Right? And you don't always have a market for those

34:33

assets, right? So, you

34:35

know, sometimes they've been marketed, sometimes there

34:38

was no time to market them. Um , yeah , sometimes

34:40

we try to slow down the transaction. They

34:43

have had clients who are willing to, you know, essentially

34:46

pay an option fee, a couple million dollars

34:49

to allow the business to continue to operate. So

34:51

we could at least do some form of diligence

34:53

in a couple of weeks that is, you know, not

34:55

perfect, but at least some diligence.

34:58

Um, and if , if they decide to walk away, they

35:00

just assume that that's a fee for, you

35:03

know, looking at the business. Um,

35:05

and sometimes you have to do that because you need, you

35:08

know, especially if you have very litigious stockholders

35:11

or creditors who are being wiped out,

35:13

you need something, you need a fairness opinion,

35:16

you need something to show that

35:19

you're , what you're paying is the right value, even if

35:21

there is nobody else, it's hard to prove a negative,

35:23

right? So you need somebody else to

35:25

come in and be able to provide that to you

35:28

otherwise, you know, you're essentially just walking

35:30

into litigation.

35:32

Yeah, it's difficult because you can

35:34

have a piece of paper that says what a value is,

35:36

but the market really talks.

35:39

One of the things that we often do when

35:41

, um, we're faced with a

35:43

, you know, business is losing money and

35:45

there's an offer on the table, but

35:48

you think, okay, well how, how

35:50

much is it going to cost for us to run a

35:52

60 day process and

35:56

are the losses , um, that need

35:58

to be funded going to be covered

36:01

by the potential for getting more money

36:04

<laugh> if we run a robust process, versus

36:07

just taking the offer that's in front of our

36:09

face right now and doing the deal. Um,

36:11

so it depends on the operating

36:14

losses and if anybody's willing to fund them

36:16

if they're out of cash.

36:19

Yeah, I mean , just coming back to that compressed timeline

36:21

and imagining any buyer without

36:24

the time to really dig in

36:26

and do that diligence, whatever offer

36:28

they put in place, they're trying

36:30

to even , you know, it doesn't matter

36:33

how well intended they are, they're looking at

36:35

all of their risks and to the extent

36:37

that they can do diligence or not. Um,

36:40

so I imagine that while

36:43

they might put in as many caveats as they can, whether it's

36:45

starting with an option or trying to figure

36:47

out , um, some

36:49

kind of tiered transaction or

36:51

, um, I know

36:53

healthcare has a little bit of struggle with option

36:56

models inside that purchase price.

36:59

Um, yeah, it's just a lot <laugh>

37:02

pressure for everyone right, on these deals. Um,

37:05

it's been really interesting to follow this conversation

37:07

through that distress transaction and all these different

37:09

risks. Um, I especially appreciated

37:11

examples that you brought

37:13

up because it helps really see specific

37:16

scenarios and what , um, individual

37:18

sellers and buyers did when

37:20

they were in that difficult position.

37:23

Mm-Hmm. <affirmative> , is there anything else, any

37:26

other examples you wanna share or anything you wanted

37:28

to maybe you thought

37:30

about saying and , um, wanna come back to before

37:32

we wrap up?

37:35

I , I think I'll say something that

37:37

, um, what I've

37:39

found is that, you know, you think that you're

37:41

dealing with rational players

37:44

on all sides. You know, people will make

37:46

decisions in their own economic interests,

37:49

and so you can do some analysis based on that.

37:52

Um, but there's, there's always a curve

37:55

ball , you know, <laugh> , no one, no one just

37:57

looks at the numbers on the page and, and, you

37:59

know, and acts, there's the emotions, there's

38:02

the historical relationships. They

38:04

may have other reasons for wanting,

38:07

you know, a certain outcome that might not be

38:09

the most economically advantageous.

38:12

Um, so yeah , it reminds me

38:14

of , um, that, that , um, Tom

38:16

Cruise and Jerry McGuire , when, you know, you've got a

38:19

client and you're like, help me help you

38:21

<laugh> , help me help you, you know , um,

38:24

you want them to act in their rational interest,

38:27

but they don't always , and that's on all

38:29

sides. So it means trying

38:31

to get things over the line sometimes. Um,

38:34

you know , we'd recently had a case where

38:37

it looked like it was lined up for a

38:40

, um, a good settlement and

38:42

one of the parties just came

38:45

to the, to negotiation with,

38:47

with the curve ball and threw , blew

38:50

the whole thing up. Um, and there

38:52

was really no , um, rational

38:55

reason to do that. It was, they'd

38:58

had, you know , just years

39:00

and years of acrimony with the other

39:02

party and they just couldn't help themselves <laugh>.

39:04

So that type of thing happens all

39:07

the time. Um, and

39:09

, uh, so when you know you do get the

39:12

transaction over the line and it's successful

39:14

and you can have the business , um,

39:16

go on, its merry way, it, it is

39:19

really satisfying. But there's a , that's

39:21

why it's a bit of a wild ride, don't you think , um,

39:23

Andrea,

39:24

Yes, absolutely. Completely agree

39:27

with Claire . Um, you

39:29

, you think you know what you're walking into , but

39:31

in these situations yeah, emotions tend

39:33

to run high and, and convincing people

39:36

of the right thing versus , um, you

39:38

know, what they feel is , is

39:40

, could be difficult for sure, <laugh> . Definitely

39:43

. Alright , well

39:45

thank you guys. Thank you both Claire and Andrea

39:48

for sharing your expertise. Um,

39:51

if the listeners wanna get in touch with you, is there

39:53

a preferred way you'd like them to reach out?

39:58

Sure. Um, our website, it's

40:00

Gibbons, G-I-B-B-I-N-S

40:03

advisors . And our con contact information

40:05

is there , um, myself

40:07

and Ron Winters, we the principal. So

40:10

reach out to either of us, would be delighted

40:12

to speak to you.

40:14

Yeah . And Andrea , um, yeah, you

40:16

can reach us at um, kl

40:18

gates.com or on LinkedIn.

40:21

Um, all of the phone numbers ringed my cell phone

40:23

, so it's pretty easy to get ahold of us . Awesome.

40:27

And you can find the business law and a

40:29

governance practice group for the A HLA communities

40:32

where there's lots of conversations

40:34

and activities happening there as well. Um,

40:37

yeah, so thanks again. It's been a pleasure

40:39

.

40:40

Thank you so much ,

40:41

Jessica . Thanks Claire .

40:49

Thank you for listening. If you enjoyed

40:51

this episode, be sure to subscribe to

40:54

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40:58

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41:00

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41:04

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