😷New Chapter 11 Filing - Verity Health System of California Inc.😷

Healthcare. Once Powered by Hedge Fund

8/31/18

Verity Health System of California Inc. ("VHS"), a California nonprofit public benefit corporation that operates six acute care hospitals, filed for bankruptcy today. The system suffered from decades of operating losses and too much debt. Unfortunately, it also appears to have suffered from a lack of vision, admittedly continually maintaining the status quo in the face of robust headwinds. 

In 2015, BlueMountain Capital Management LLC purchased the system for $100mm while also arranging for $160mm in loans (subject to a variety of conditions imposed by the California Attorney General). The health system, however, did not turn around. In 2017, NantWorks LLC acquired a controlling stake in the system's management company, Integrity, from BlueMountain and loaned the company an additional $148mm. Did this do the trick?

Of course not. We wouldn't be writing about it if it did. 

Per the company:

Despite the infusion of capital and new management, it became apparent that the problems facing the Verity Health System were too large to solve without a formal court supervised restructuring. Thus, despite VHS’ great efforts to revitalize its Hospitals and improvements in performance and cash flow, the legacy burden of more than a billion dollars of bond debt and unfunded pension liabilities, an inability to renegotiate collective bargaining agreements or payor contracts, the continuing need for significant capital expenditures for seismic obligations and aging infrastructure, and the general headwinds facing the hospital industry, make success impossible. Losses continue to amount to approximately $175 million annually on a cash flow basis.

Indeed, the company cites the following factors for its fall into bankruptcy: (i) below-market Medicare reimbursement rates (~20-43% below market), (ii) an approximate 5% increase in labor rates annually, (iii) underfunded pension plans and ongoing pension funding requirements in the millions of dollars, (iv) the need for tens of millions of dollars in IT investment, (v) millions of dollars of expenditures required under the conditions imposed by the California state AG and (vi) needed medical equipment expenditures. 

Accordingly, to confront its debt and preserve the value of the system as a going concern, the system filed for bankruptcy to pursue a sale to new ownership/leadership. 

  • Jurisdiction: C.D. of California 

  • Capital Structure: $461.4mm of secured debt     

  • Company Professionals:

    • Legal: Dentons US LLP (Samuel Maizel, John Moe II, Tania Moyron)

    • Financial Advisor: Berkeley Research Group LLC

    • Investment Banker: Cain Brothers

    • Claims Agent: KCC (*click on company name above for free docket access)