According to a news report, Quorum Health – a 24 hospital chain – is considering filing for Chapter 11 bankruptcy. Bloomberg had this to say: “Management has been negotiating with stakeholders on a variety of possible deals, according to people with knowledge of the company’s plans, who asked not to be named discussing private negotiations. At the same time, Quorum is preparing Chapter 11 plans as hope fades for an out-of-court solution, the people said. No decision has been made, and the outcome could still change.”
The hospital group had not been in the best financial shape even before Covid-19 caused many elective procedures – on which the hospital depends for income – to be postponed; deepening its troubles. As of Friday April 3, 2020, the 2023 subordinated notes were trading (27%) off par. As a result we’ve downgraded Quorum to CCR 4 from CCR 3.
We currently project no material loss on the most senior debt and a (30%) realized loss for the subordinated obligation. The BDC lenders involved are both KKR-managed: FS-KKR Capital (FSK) – which is only in the subordinated debt with $6.0mn – and non-traded FSIC II, which has exposure in both kinds of debt ($11.6mn). In toto, the realized loss would be ($3.0mn). The $1.8mn of investment income being received by the two lenders may shortly be switched off.
Ironically, despite the dire situation for the company, and the two lenders involved, the impact of any set-back should be relatively modest for both funds given the size of the exposure as a percentage of total portfolio assets and income. More worrying is that Quorum may be one the first of many hospital and medical center failures at a time when some might expect these institutions to be gainfully employed. It’s yet another bitter twist brought on by Covid-19.