Hanger Orthopedic Group is seeking an amendment from its bank lenders after violating the total leverage covenant under its bank credit facilities. Particularly weak results for the second quarter caused the violation, according to Moody's Investors Service, which has downgraded the bank debt from B1 to B2. "They have experienced weaker sales and at the same time, the company has had increased expenses for marketing initiatives, a new billing system and Sarbanes-Oxley [compliance]," said Will Lee, a Moody's analyst.
Hanger has a $100 million revolver, with an outstanding balance of $40.5 million and a $150 million "B" loan, led by GE Capital and Lehman Brothers. According to Mark-It Partners/LoanX, the "B" loan was quoted around par in a thin market. The company also has $200 million of 10 3/8% bonds that have been downgraded one notch to B3.
Hanger, a provider of orthotic and prosthetic patient-care services, has obtained a waiver, but it could not be determined how close the company is to getting the amendment and officials at Hanger did not return calls. According to a release from Hanger, management was set to meet with the administrative agent of the senior credit facilities on Aug. 18 to propose a cure to the covenant violation. Until the amendment is obtained, the company does not have access to its revolver.
Moody's has a litany of concerns aside from the deteriorating performance, including high reliance on government funds and Medicare's recent decision to freeze rates for three years. There has also been pricing pressure from large commercial payors, a competitive environment and weakening industry utilization and growth trends. Moody's concerns over these issues are compounded by the number of other problems that have arisen at the company recently, including billing discrepancies at the West Hempstead center and an accounting error related to uncollectible receivables recently uncovered.