Capella Healthcare's $48 million second-lien was held back from trading last week because it was too small to attract interest, said traders. Its $107 million first-lien term loan did better, breaking in the secondary market at 100 3/4. The loan traded thinly, however. One trader estimated $15-30 million changed hands. "Not much traded. It is a really small deal," said one trader.
Capella Healthcare is a small, start-up operator of acute care hospitals. The proceeds of the offering, along with $66 million of common equity contributed by its parent, private equity firm GTCR Golder Rauner, will be used to buy four rural hospitals from the Hospital Corporation of America for approximately $260 million. HCA sold the hospitals as part of its strategy to divest hospitals in rural and non-urban markets.
The second-lien term loan was originally $58 million, but was downsized because investors showed more interest in the first-lien loan, said Josh Barl, an associate at GTCR. The first-lien was increased to $107 million from $97 million because of the stronger interest. Barl said the firm did not expect the second lien to trade in the near term because of the number of players that hold the loan. He would not comment on the number of investors participating in the second lien, but said a small fund holds more than 50%. "We didn't expect it to trade given the number holding it," said Barl.
Standard & Poor's assigned a B rating to the first-lien loan and a '2' recovery rating, indicating a 80-100% expected recovery if it defaults. The agency rates the second-lien term loan CCC+ with a recovery rating of '4', indicating an expected 25-50% recovery of principal if it defaults. Moody's Investors Service assigned a B3 rating to the first-lien term loan and a Caa2 to the second lien.
"The low speculative-grade ratings reflect the numerous risks that Capella's experienced management team will have in operating a small start-up hospital company with no record as an independent entity," said S&P analyst David Peknay, in a release. The agency added the company is highly leveraged with debt to EBITDA of six times.
Commenting on S&P's concerns that the company is a start-up, Barl said there is always the risk associated with starting a company from scratch, adding that Dan Slipkovich, the ceo of Capella, has a long history in the healthcare business, as does GTCR. "The risks are not as significant as they made it out to be," said Barl. He added that the firm does not think the company is overlevered. He said Capella's debt to EBITDA ratio is less than 5.5 times. "We have taken steps to reduce costs at the facilities. They had bloated infrastructure costs," he said.
Dan Slipkovich, ceo of Capella Healthcare, did not return calls.