Envision: The PE Healthcare Harbinger

From Bloomberg, some crazy machinations involving the restructuring of Envision, the massive medical staffing company, in order to pay off debts.

This is because Envision had $7 billion debt from its 2018 leveraged buyout by KKR, and KKR needed to find ways to exploit the paper details in order to restructure the company without getting taken to court and blocked.

“Loose documents have become the norm rather than the exception,” says Damian Schaible, co-head of restructuring at Davis Polk & Wardwell. “If we go into a real recession, we are going to see more and more borrowers and sponsors seeking to exploit document loopholes to create leverage against and among their creditors.”

Here’s the quick summary, which invokes the playbook of spinning off the valuable assets in order to essentially dump the crappy ones:

Envision, which also explored a consensual debt exchange that would have raised less funding, ultimately opted for what is considered one of the most controversial and coercive out-of-court restructurings to date. The [initial] deal…would prove to be just the beginning of a series of maneuvers that eventually allowed the company to restructure the vast majority of its debt but forced creditors to turn against one another.

The strategy rested on two pillars. The first was a drop-down transaction, in which a company’s most valuable assets are moved away from existing creditors and used as collateral for new debt. The second was a series of debt repurchases and exchanges that gave certain creditors priority over others and pushed anyone who declined to participate to the end of the line for repayment.

We always talk about stocks being risky and bonds being relatively safe, but corporate debt is its own beast in this world where overleveraged companies can successfully exploit loopholes to screw over current creditors in order to obtain new financing.

Envision first designated [their profitable ambulatory surgery business] Amsurg as a so-called unrestricted subsidiary, effectively moving it out of reach of existing creditors without violating provisions in the credit agreement that prohibited moving or transferring the asset. The Amsurg assets would then be used as collateral to borrow $1.3 billion from Angelo Gordon and Centerbridge, who’d effectively be stepping ahead of everyone else in the repayment waterfall. Envision could then use the cash raised from the hedge funds to boost liquidity and to repurchase some of its existing debt at steep discounts.

Ultimately, only $153 million of the original loan was left outstanding, as owners of 96% of the debt had exchanged their holdings and waived their rights to litigate the transaction in the future.

Likely a harbinger of things to come. The “bad guys” largely win. And for creditors, better to get pennies on the dollar than nothing.

The years of low-interest easy money did a lot of emboldening and overleveraging, and everyone was eager to deploy capital on dubious deals:

There was a bitter irony in the way most of the company’s creditors ended up competing for crumbs. Four years earlier, when Credit Suisse Group AG sold the debt that financed KKR’s purchase of Envision, demand was so high that a salesperson teased investors with a picture of cake crumbs on a plate. The message then: Hurry up and grab it before it’s all gone.

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