Envision Healthcare filed for Chapter 11 bankruptcy on Sunday, just five years after it was taken private by KKR in a blockbuster $10 billion leveraged buyout.
Tennessee-based Envision houses doctors in hospital emergency rooms and operates surgery centers separately, but both businesses have been hit by regulatory changes, the impact of the Covid-19 pandemic on patient volumes and higher labor costs. Private equity’s presence in U.S. healthcare has also come under increasing scrutiny from industry regulators.
More and more companies are being forced into court-led restructuring as sharply rising interest rates dry up capital. Under the terms of a settlement between Envision and its creditors, KKR’s initial $3.5 billion equity investment is expected to be wiped out in the restructuring as senior lenders take over the company.
The practice of Envision and other doctors has been heavily criticized for “surprise charges,” in which emergency room patients are billed high for treatment when insurance plans don’t cover the costs at a particular hospital. In 2022, the federal No Surprises Act goes into effect to curb such moves.
The company is also in a dispute with UnitedHealthcare, accusing the insurer of shirking responsibility to reimburse patients in as many as a third of cases. This year, Envision won a $91 million arbitration award against UHC for claims in 2017 and 2018.
People close to Envision told the FT that if UHC pays Envision as it expects, the company will have enough liquidity to avoid bankruptcy this year.
UHC did not respond to a request for comment, although it has previously sued Envision for alleged overbilling. It told the FT at the time of the arbitration award that it would “continue to work hard to protect our members and customers from a small number of bad actors.” . individual cost of care”.
Last August, Envision completed a complex refinancing deal to boost liquidity and buy back existing debt at a discount. The deal centers on separating its AmSurg surgical facilities from its doctors’ offices and borrowing new funds against those facilities. These terms prevent existing Envision lenders from making claims on the more profitable AmSurg assets.
AmSurg’s new $1.1 billion senior loan facility was provided by Angelo Gordon, Centerbridge Partners and Pimco. Pimco, then a large existing creditor of Envision, swapped its existing loan for a stake in AmSurg’s junior loan. Envision also raised cash from a new loan at the time.
The bankruptcy settlement that Envision will require court approval has been negotiated for weeks and has the majority support of multiple creditor groups. It called for the reorganization of Envision, its physician practice business, as a separate company from AmSurg. Envision and AmSurg currently have about $8 billion in combined debt, which will be cut to about $2 billion after bankruptcy.
Pimco is poised to swap its junior AmSurg loan for a restructuring equity stake in the company and is leading a $300 million financing to acquire the remaining one-fifth of the surgical facility company currently retained by Envision.
Envision’s senior lenders, including investment firms Strategic Value Partners, Brigade Capital, Blackstone and Eaton Vance, will exchange their notes for equity in the restructured Envision. Those who hold the most subprime Envision loans and hold $1 billion in bonds (currently trading for less than a penny) will effectively be out of the game.
Envision joins a large list of bankruptcy filers this year that includes Bed Bath & Beyond, Avaya, Party City, Diamond Sports, Serta Simmons and Silicon Valley Bank Group.
Envision expects the lawsuit it filed in Houston federal bankruptcy court to close within three to four months.