Summit Behavioral Healthcare Launches Pro Rata LME for $125M of New Money; A&E If High Participation, Drop-Down Plus Extend and Exchange Otherwise

Summit Behavioral Healthcare launched a pro rata liability management exercise to secure $125 million of new money with no discount capture, according to sources. The deal is expected to receive very high participation, the sources said.

The new money will come in the form of a super senior first lien, first-out, or FLFO, term loan, backstopped by an ad hoc group of majority lenders, who helped negotiate the transaction, the sources said. Backstop parties are receiving a $4.375 million premium in the form of FLFO loans. The new-money FLFO, which pays SOFR+575 bps, matures on Dec. 31, 2029, with a maturity extension clause embedded.

All existing term lenders can participate in the new money under the condition of agreeing to a roughly one-month extension on their existing term loan holdings, the sources said. The company can subsequently refinance their extended paper with new SOFR+425 bps first lien, second-out term loans due Dec. 31, 2029. The participation deadline is tomorrow, Wednesday, Aug. 13.

The structure would give the company two paths forward to execute the transactions, sources noted.
If a target participation level of extension is met, assuming that lenders holding substantially all of the loans agree to extend and swap their paper into new FLSO loans, the transaction will end up being a plain vanilla amend-and-extend, with the debt maturity first extended to December 2029, before being further extended to December 2030 if liquidity at the end of 2027 exceeds $10 million, according to sources.

But if participation falls below the company’s target level, the transaction will turn into an extend and exchange, with participating lenders benefiting from dropped-down assets, which would punish holdout lenders, the sources said.

Summit Behavioral Healthcare’s revolver is extended as well as part of the transaction, according to sources.

The deal structure is similar to that of Ivanti in May. Ivanti transferred some collateral for its existing debt from a guarantor entity to a nonguarantor entity. All of the existing Ivanti first lien and the second lien term loan lenders ended up consenting to the proposed LME.

The mental health and addiction treatment facilities operator and its advisors reached out to a broader base of lenders last month, inviting them to sign nondisclosure agreements so they can review the terms of a proposed transaction.

Octus previously reported that the company is working with Kirkland & Ellis and PJT Partners and an ad hoc group of lenders is being advised by Milbank and Guggenheim Securities.

Summit Behavioral Healthcare has wrestled with margin weakness from Department of Veterans Affairs referral losses and committed capital expenditures. These factors contributed to higher leverage and a cash flow deficit, according to an S&P Global Ratings report in May.

An estimate of the company’s capital structure is shown below:
 

The company’s roughly $796 million term loan due 2028, which was repriced in April 2024, has slid to the 70s, down from the 90s in February, according to Solve. A list of CLO lenders can be found HERE.

Summit Behavioral Healthcare, sponsor Patient Square Capital, Kirkland & Ellis, Milbank and Guggenheim Securities did not respond to requests for comment. PJT declined to comment.