Healthcare Distress Splits Restructuring Playbook Across Hospitals, Medical Practices and Senior Living Spaces, Says King & Spalding’s Wilson

By Priya Batchu

Distress in the healthcare sector is being driven by increasingly different restructuring dynamics across senior living facilities, private equity-backed medical practices and rural hospitals – depending on the type of debt, payor mix and operational challenges, according to Thad Wilson, bankruptcy & insolvency litigation partner at King & Spalding LLP.

Wilson noted that he is seeing distress across medical practice groups, senior living facilities, acute-care hospitals and rural hospitals. The restructuring playbook can differ depending on the type of capital structure and type of healthcare business, Wilson said. For example, a rural hospital may have municipal debt and creditors that face different constraints than a private credit lender financing a sponsor-backed medical practice.

“They have a very different set of dynamics at play,” Wilson said. “In a rural hospital, for example, you have local and state politicians that will take a very keen interest.”

The range of alternatives available to some communities can also affect how creditors handle a distressed rural hospital.

“The bond trustee may try to be more supportive of those types of facilities because there aren’t a whole lot of other options,” Wilson said. “For example, are there any buyers to potentially acquire that hospital in a 363 sale in bankruptcy and what is the value that they are likely to obtain in a 363 sale?”

Regarding distressed medical practice groups, Wilson pointed out how physicians often hold a considerable amount of leverage due to how much operating value is at stake if they leave the practice.

“The doctors have a considerable amount of leverage,” Wilson said. “Most of them are locked up with noncompete agreements, but nevertheless, if they walk out the door and are unwilling to work at that practice group, then the lender can be left with very little collateral other than maybe receivables that it can collect.”

Wilson points to how lenders have generally been cooperative with distressed healthcare borrowers in an effort for companies to restructure out of court, but he has seen creditors take a more aggressive approach in some situations.

“There are certain segments of the healthcare sector where lenders have gotten very aggressive,” Wilson said.

One example he talked about was Life Spine, a spinal implant manufacturer, where Wilson represented founder Michael Butler. Wilson said the private credit lenders to the company exercised rights under a pledge agreement to replace two directors appointed by Butler and his family trusts.

“They already had two board seats, so that exercise of rights gave them control of the majority of the board, four to three,” Wilson said.

Wilson described the move as an example of lenders using contractual control rights when a healthcare credit comes under pressure.

Insurers are also becoming another pressure point for healthcare providers, especially when faced with liquidity pressure, according to Wilson.

“At the first sign of financial distress, insurers are ratcheting up the pressure on medical providers by not remitting payments under the terms of the parties’ agreements, and that’s had a substantial impact on many healthcare providers that ultimately filed bankruptcy,” Wilson said, referring to disputes involving third-party insurers such as the dispute between Jackson Hospital & Clinic and Blue Cross and Blue Shield of Alabama and similar reimbursement challenges occurring across numerous healthcare bankruptcies.

Wilson’s observation is that insurers may have more negotiating leverage when a provider is financially distressed.

“The insurers’ playbook is to squeeze the distressed hospitals outside of bankruptcy, hoping they take a deal to resolve the claims for cash on some significant discount, and if those entities file for bankruptcy, settle those claims for a fraction of the amount of the claims payable under the parties’ agreement,” Wilson said.

As for distress in senior living facilities, Wilson sees the point of stress driven by a combination of real estate valuations, interest rates, litigation and operating problems occurring at the facility level. He does not, however, see a lack of buyers as a fundamental issue.

“I don’t think it’s hard to find buyers in the senior living space,” Wilson said.

Wilson pointed to how Genesis Healthcare pursued a portfolio transaction, while Inspired Healthcare designated multiple successful bidders across its properties.

“Taking Inspired Healthcare as an example, the sale process suggests a fairly substantial buyers’ market in senior living exists,” Wilson said. “The sale process included large institutional buyers, a handful of public companies, private equity sponsors, and other investors.”

However, his concerns lean toward asset values as financing conditions remain difficult.

“Values of underlying real estate will likely decline as interest rates rise, so the likelihood of further defaults under the loans on senior living facilities are more likely to occur,” Wilson said, expecting operating problems and litigation to continue contributing to senior living distress.

A decline in care at a facility can quickly hurt the business, he said, comparing the dynamic with a run on a bank when reports of mistreatment become public.

“If patients are mistreated and that news becomes public, not only can significant litigation ensue, but reputational harm can cause significant distress in short order,” Wilson said.
 

Michaels Cos.

The Apollo-backed crafts retailer’s debt has rallied toward par while a series of buybacks has fueled Wall Street speculation that the company is laying the groundwork for an initial public offering. This follows the issuance of $3.75 billion in new first lien and second lien debt, comprising a $1 billion first lien term loan, $2 billion of 8.5% first lien notes due 2033 and $750 million of 11% second lien notes due 2034, that was used to refinance its capital structure earlier this year.

Management recently made upbeat comments about the company capitalizing on a gradual shift in people’s preferences to analog hobbies from doomscrolling and other screen time at an industry conference. Octus’ coverage of Michaels Cos. is HERE.

America’s Car-Mart

The publicly traded auto retailer is weighing a potential bankruptcy filing, possibly within weeks, amid continued performance and liquidity pressures. The company may execute a transaction, including a sale, on an in-court or out-of-court basis, and a final decision about a bankruptcy filing has not been made.

The company disclosed that a special committee of its board of directors remains engaged in evaluating strategic alternatives, while to accommodate those efforts lenders led by Silver Point Finance extended a credit waiver through Thursday, Oct. 1. Advisors for the company include Houlihan Lokey and FTI Consulting. Octus’ coverage of America’s Car-Mart is HERE.

Cast & Crew

Certain lenders to the EQT Partners-backed entertainment payroll software provider have signed nondisclosure agreements to negotiate a potential recapitalization. An ad hoc lender group advised by Davis Polk and Houlihan Lokey is bound by a cooperation agreement while the company is being advised by Moelis as it considers its options amid ongoing performance woes. Octus’ coverage of Cast & Crew is HERE.

Getty Images

The publicly traded stock-photo provider is preparing to file for chapter 11 as soon as the end of this month as it faces a liquidity crunch, elevated leverage following a failed merger with Shutterstock and payment obligations tied to litigation. On Aug. 31 the company announced that it intended to use a 30-day grace period on interest payments due for its 9.75% notes due 2027 and 14% notes due 2028.

Getty is working with Simpson Thacher and Guggenheim, term loan creditors have organized with Gibson Dunn and Houlihan Lokey, and unsecured noteholders are working with Akin Gump and Perella Weinberg. Octus’ coverage of Getty Images is HERE.
 

Cable One

The publicly traded cable operator and its joint venture partner GTCR are working with advisors as the company considers its options. Cable One is working with Alvarez & Marsal as financial advisor, while GTCR, which owns 55% of Mega Broadband, is working with Kirkland & Ellis, Latham & Watkins and Evercore. This comes as Cable One, which owns the other 45% of Mega Broadband, faces a $475 million to $495 million cash payment to GTCR for the latter’s ownership stake of Mega Broadband under a put that was exercised earlier this year. Cable One also disclosed it had drawn $700 million under its RCF earlier this week, implying the revolver is now fully drawn. Octus’ coverage of Cable One is HERE.

Resource Label Group

The Ares-backed label and packaging company is working with Evercore as financial advisor ahead of its 2028 debt maturities. The company is one of three primary sub-investment-grade packaging players, Multi-Color and Brook + Whittle being the other two, that have struggled recently with high leverage, a prolonged recovery from customer destocking, the growth of private-label competitors and secular shifts in consumer beverage preferences. The company’s lenders are working with Gibson Dunn as legal advisor and are bound by a cooperation agreement. Octus’ coverage of Resource Label Group is HERE.

Peloton

The publicly traded connected-fitness company is working with Goldman Sachs to refinance its existing 2029 debt maturities. The company is working with the bank to issue senior secured notes that may price at a yield of 8% to 8.25%. Octus’ coverage of Peloton is HERE.

Thrive Pet Healthcare

Certain lenders to the TSG Consumer Partners-backed veterinary network are once again seeking advice from Akin Gump and PJT Partners to evaluate next steps as the company’s 2028 maturity wall approaches. For the second quarter, the company disclosed that adjusted EBITDA rose 7.4% year over year while revenue was up 5.2%. The company ended the quarter with $94.1 million in cash. Octus’ coverage of Thrive Pet Healthcare is HERE.
 

Brightline Florida

Brightline Florida, a private, high-speed intercity passenger rail system operating in central and south Florida, filed chapter 11 on Sept. 25 in the District of New Jersey, reporting $1 billion to $10 billion in both assets and liabilities. The debtor entities do not include the operating company – Brightline Trains Florida LLC – potentially avoiding the application of section 1163 of the Bankruptcy Code, which requires the appointment of a trustee for a debtor that is a “railroad.”

The company announced that Brightline Trains Florida “will not file for chapter 11 and will continue to operate in the ordinary course under the leadership of its existing management team.” The company also says certain existing stakeholders including Assured Guaranty and an ad hoc group of mutual fund bondholders have entered into a restructuring support agreement.

Supporting stakeholders have committed to provide $490 million of new long-term capital to Brightline Trains Florida, consisting of $140 million of additional senior debt and $350 million of new junior debt, according to the press release. Assured Guaranty separately announced that certain Brightline Florida stakeholders agreed to provide the OpCo with $258 million of postpetition funding, with Assured providing up to $178 million of that DIP funding. Octus’ Brightline Florida coverage is HERE.
 

Braskem Idesa / Braskem SA

Judge Christopher Lopez confirmed the Braskem Idesa debtors’ prepackaged plan at a hearing yesterday, Sept. 24, overruling the U.S. Trustee’s objection to the plan’s opt-out nondebtor releases. However, soon after the hearing, the São Paulo Second Bankruptcy and Judicial Recovery Court overseeing Braskem SA’s Brazilian recuperação extrajudicial, or REJ, proceeding granted the Braskem SA noteholders’ motion to block the parent from performing its commitments under the plan.

In a letter filed on the docket after the hearing, the Braskem SA noteholders urged Judge Lopez to delay entering the confirmation order in light of the Brazilian ruling in order to allow the parties to “determine whether the [Braskem Idesa] Plan remains feasible given Braskem’s inability to comply with its obligations thereunder.” However, Judge Lopez then entered the confirmation order.

Braskem Idesa, Braskem SA’s Mexican subsidiary, filed chapter 11 in August with a prepack plan that would reduce debt by more than $920 million and equitize over $1 billion in pre- and postpetition financing, backed by the parent’s commitment to extend $486 million in new money. Reorganized equity would be distributed among equityholder Braskem SA, secured noteholders and existing shareholders. Octus’ Braskem Idesa coverage is HERE and Braskem SA coverage is HERE.
 

Paramount, California Settlement

Paramount Skydance reached a settlement with California and 11 other states to resolve states’ challenge to the company’s acquisition of Warner Bros. Discovery. The proposed consent decree focuses on behavioral remedies across theatrical films, basic cable and other categories. California District Court Judge Araceli Martínez-Olguín quizzed the parties on the consent decree at a Sept. 24 hearing and said she would issue an order in “due course.”

Octus reported that Paramount Skydance kicked off the syndication process for its $52 billion debt package to fund the WBD acquisition. Octus’ coverage of Paramount Skydance is HERE.

Claritev Appellate Ruling

California Court of Appeal reversed a state trial court’s 2024 dismissal of the Verity Health liquidating trust’s California-law algorithmic price-fixing claims against Claritev, fka MultiPlan. The ruling not only resurrects the Verity trust’s claims but could also bolster suits brought by other healthcare providers alleging that Claritev/MultiPlan’s proprietary pricing algorithms provide cover for out-of-network healthcare reimbursement price-fixing by insurers. Octus’ coverage of Claritev is HERE.

Virginia Data Center Framework

Virginia Gov. Abigail Spanberger announced a “Data Center Accountability Framework” designed to protect Virginia ratepayers, impose environmental standards and bolster community input. The governor signed an executive order to immediately implement some aspects of the framework, although many will require action by the Virginia Legislature. Octus’ coverage is HERE.