Some investors are miffed over the new dividend deal for Triumph Healthcare, which is in the market just six months after the Center for Medicare and Medicaid Services (CMS) threatened to cut Medicare reimbursement by what would have equaled about 10.4%. While Triumph and other long-term acute care hospitals were given a pass when CMS only cut the reinbursement by about 4%, some investors who either took a hit when the debt dropped or lost confidence in the industry and sold off their debt are not recommitting. The deal is fully underwritten, prompting investors to speculate that lead banks BNP Paribas and Bear Stearns may end up eating a lot of it. A BNP Paribas spokeswoman referred calls to a banker, who could not be reached. Another BNP banker declined comment and calls to a Bear Stearns banker were not returned. A spokeswoman for sponsor TA Associates, which is set to receive a $125 million special dividend, and Triumph CFO Larry Humphrey, did not return calls.
"We didn't like it before the dividend and really don't like it after dividend," said one portfolio manager who is not going to recommit to the deal and has sold off the debt. "Our view was, CMS took a big swipe at that sector [and after] a lot of lobbying, the swipe was greatly reduced, but I think we got the feeling from reading their document, they're coming back for more. If you read the fine print that CMS came out with, [it basically says] 'yeah we're coming out for more, don't be complacent.' For them to take a dividend, that is the most egregious thing we could think of."
The banks anticipated participants in the old loan would roll over into this credit, but some accounts that were previously committed are not going to do this deal. The deadline to commit was last Wednesday, but the leads were giving investors extra time because of the holiday-shortened week. "This is how the market gets corrected," said one investor who called the deal "offensive." "We have LIBOR 175 trading below par so they are going to have some big loan on their balance sheet trading below par; how is that not fair?"
The financing consists of a seven-year, $35 million revolver; a seven-year, $250 million first-lien term loan and an eight-year, $110 million second-lien term loan. In addition to paying the dividend, it refinances the company's existing $35 million revolver, $159 million first-lien term loan and $80 million second-lien term loan. In the fall of 2004, BNP led a $115 million credit backing the private equity group's acquisition of Triumph (LMW, 11/1/2004).
In January after CMS made the announcement, Standard & Poor's placed Triumph on CreditWatch with negative implications. The company receives about 80% of its revenue from Medicare and the proposed cut would have been equal to about $30 million in revenue or almost 50% of EBITDA (CIN, 1/30). A spokeswoman at CMS did not return a call by press time.
Standard & Poor's assigned a B+ to this first lien with a recovery rating of 1 and a CCC+ and 4 recovery rating to the second lien. Moody's Investors Service assigned a B2 to the first lien and Caa1 to the second lien. Moody's said that despite the increase in leverage expected to be about 5.5 times it affirmed Triumph's B2 corporate family rating because of the company's strong operating performance with yearly improvement in same-facility revenue per patient per day for the quarter ended March 31, 2006. "The company did a great job in managing around CMS," one banker said. Despite the Medicare cut, it still expects EBITDA to be higher in 2007 than it was in 2006, he explained. According to Moody's, Triumph completed its acquisition of SSCI Health Services Corp., another LTACH operator, and combined company revenue was about $273 million for the twelve months that ended March 31. Pro forma for the acquisition, revenue for the same period would have been about $333 million.
David Peknay, an S&P analyst, said that the company has taken some action to counteract the cut, which should not be as bad as was originally anticipated. Triumph's efforts to boost patient volume at the hospitals acquired in the SCCI transaction, coupled with new hospital openings will also offset some of the potential impact of the price cut. "Most of the cut will end up getting negated by their effort," he said.