Team Health Services: Bond Values Lower

The BDC Credit Reporter is a work-in-progress in that we are still loading all the several hundred under-performing BDC financed companies into our database and this website. We mention this to explain why we’re only getting round to waving warning flags about Team Health Inc. (aka Team Health Holdings), a company that has been under-performing since the IQ 2019; held by 6 different BDCs and which seems to be getting worse rather than better.

Back on August 12, 2019, as this trade article summarizes nicely, Moody’s downgraded the outlook for the company:

Team Health Holdings Inc.’s ongoing contract fight with UnitedHealth Group Inc. is hurting the bond status on the Knoxville-based hospital staffing and management company.

Moody’s Investors Service on Friday downgraded the outlook for Team Health from stable to negative, after affirming the company’s B3 Corporate Family Rating and B3-PD Probability of Default Rating.

The change of outlook reflects rising uncertainty around Team Health’s ability to reduce leverage given its recently disclosed dispute with UnitedHealth Group Inc., one of its largest commercial payors,” Moody’s said.

Moody’s also affirmed the B2 rating on Team Health’s senior secured credit facilities and Caa2 rating on its unsecured notes“.

We’re read Moody’s Ratings Action, and it’s clear that Team Health has a myriad business and financial challenges, including debt to EBITDA (admittedly a multiple that has become almost meaningless without knowing how the denominator is derived) of over 8x.

Just as distressing is the market price of the 2024 publicly traded 2024 Term loan which at December 12, 2019 was trading at a (28%) discount. Many BDCs hold that first lien debt which was trading at an (18%) discount in the market on September 30. (We note that the BDCs own valuations ranged from a (1%) to a (14%) discount in their IIIQ 2019 portfolio values). By the way the BDCs with exposure to Team Health include Barings BDC (BBDC) but only in the first lien; FS-KKR Capital (FSK) and four of its non-traded sister BDCs: FSIC II, FSIC III FSIC IV and CCT II. The biggest exposure is that of FSK, just under $15mn.

If the first lien debt is already trading down so much, where can be the second lien debt be that accounts for half of BDC exposure ? This debt does not trade so that’s a question without an answer, but at September 2019 quarter’s end the BDCs – all related – were writing down the debt by (22%). We’d guess the discount on the second lien – due in 202- might be as high as (50%).

We’ll have much more to say as we dig deeper and more developments occur. Our concern is not only about Team Health but similar health organizations facing pressure relating to payment practices. As the BDC Credit Reporter becomes more comprehensive quickly identifying BDC funded companies with a similar business model – and risk – will become easier. As the song says: “we’ve only just begun”.