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February 6, 2023 – Privately held Delphi Behavioral Health Group, LLC and 32 affiliate debtors (“Delphi Health Group“ or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Florida, lead case number 23-10945 (Judge Peter D. Russin). The Fort Lauderdale based Debtors, who operate a “wide range of drug and alcohol detox and treatment centers,*” are represented by Paul Steven Singerman of Berger Singerman LLP. Further board-authorized engagements include: (i) Getzler Henrich & Associates as financial advisors (and supplying an interim CEO) and (ii) Epiq Corporate Restructuring, LLC as claims agent.
*The Debtors operate 13 locations in five states (California, Florida, Maryland, Massachusetts and New Jersey) and are a portfolio company of The Halifax Group, which acquired its interest in October 2017.
The Debtors’ lead petition notes between 100 and 200 creditors; estimated assets between $1.0mn and $10.0mn; and estimated liabilities between $10.0mn and $50.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) EMD Realty Group, LLC ($763k rent claim), (ii) McDermott Will & Emery LLP ($615k professional services claim) and (iii) Matthew John Feehery ($400k disputed claim).
The Debtors' lead Petition includes minutes that note that the Debtors have executed an asset purchase agreement with an entity called "Lender AcquisitionCo LLC" for the purchase of Debtors Union Fresh Start, LLC, d/b/a Serenity at Summit, Summit Behavioral Health Limited Liability Company, d/b/a Summit Behavioral Health Princeton Junction and SBH Haverhill, LLC, d/b/a Serenity at Summit New England.
The Debtors have received commitments for $11.0mn of debtor-in-possession ("DIP") financing.
Goals of the Chapter 11 Filings
According to the Phillips Declaration (defined below), "The primary goal of these Chapter 11 Cases is to consummate a sale of the assets and facilities of the Debtors whose businesses are going to be operated post-sale, including ((i) SBH Haverhill, LLC, d/b/a Serenity at Summit New England; (ii) Union Fresh Start, LLC, d/b/a Serenity at Summit; and (iii) Summit Behavioral Health Limited Liability Company, d/b/a/ Summit Behavioral Health Princeton Junction (collectively, the 'Selling Debtors')), which will maximize the value of the Debtors’ estates for the benefit of their constituents and preserve a viable business that will continue to employ individuals, maintain contracts with vendors and service providers, and provide services and continued care to clients and patients.
In order to facilitate a sale process and the orderly administration of these Chapter 11 Cases, a subset of the Senior Secured Lenders (collectively, the 'DIP Lenders') have agreed to provide debtor-in-possession financing, and Brightwood, in its capacity as Administrative Agent under the Senior Prepetition Credit Agreement, intends to submit a stalking horse credit bid for the purchase of the assets of the Selling Debtors, subject to higher and better bids pursuant to a section 363 sale process and bidding procedures to be approved by the Court.
Thereafter, as will be set forth in the Debtors’ plan of liquidation, a liquidating trust will be established, and a liquidating trustee will be appointed, to administer any remaining assets of the Debtors."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Phillips Declaration”), Edward A. Phillips, the Debtors’ interim chief executive officer, detailed the events leading to Delphi Health Group’s Chapter 11 filing. The Phillips Declaration provides: “Following the [Debtors' 2017 Leveraged Buyout], the Company began experiencing financial difficulties, as net income after payment of expenses and debt service was modest.
That delicate balance was deeply disturbed when payors began reducing reimbursements rates starting on January 1, 2018, for inpatient and outpatient services rendered by out of network providers like the Company ('Rate Compression'), particularly at the Florida facilities. While the Summit Acquisition increased cash flow and improved liquidity, it was not enough to offset the negative impact that Rate Compression had on the revenue stream. The Company was overleveraged and unable to service the Secured Lenders’ debt.
In an effort to combat lower payments by insurance companies for out of network services to clients, the Company sought to convert to more of an in network-based model. While it was able to secure more favorable in network contracts with major payors, the Company was unsuccessful in increasing client admissions and the number of days clients remained in treatment in order to offset the differential between out of network reimbursements and in network reimbursements. In 2020, the Company ceased operations of a laboratory it had purchased as part of the Summit Entities acquisition (QBR Diagnostics, LLC) because reimbursements for testing declined and payors were increasingly demanding that providers use payors’ preferred laboratories.
The onset of COVID also exacerbated the Company’s financial difficulties, particularly for its California and Florida facilities, which historically had higher client populations due to their appeal to clients as destination treatment programs. Since the California and Florida facilities were much more dependent on clients traveling from out of state to attend programming, the census at those facilities significantly decreased when COVID prompted the cessation of travel and complicated the consistency and degree of in person treatment.
Additionally, the Company struggled to recruit and retain skilled employees at the corporate level (admissions and business development employees) and at the clinical level (nurses) due to fierce competition in the industry. The Company was simply unable to match bonuses and salaries offered by its competitors to corporate and clinical employees due to losses in revenue equating to hundreds of thousands of dollars each month, notwithstanding the additional advances made available under the Senior Prepetition Credit Agreement.
For the past couple of years, certain of the Secured Lenders, including Brightwood, have continued to fund losses through a succession of three Chief Executive Officers, the last of who resigned in January, effective on February 4, 2023. The Company’s net income for 2020 totaled $71.7 million, net income for 2021 was negative $4.5 million and net income for 2022 (through November 2022) 11 was approximately negative $18.5 million.”
In October of 2017, The Halifax Group, LLC, a private equity firm (“Halifax”), became the equity sponsor of, and provided management consulting services for, "legacy Delphi,” meaning, in substantive part, the Company’s business operations prior to its acquisition of operations known as the “Summit” entities in April of 2018. At the same time, Brightwood Loan Services, LLC (“Brightwood”), as administrative agent on behalf of a consortium of onshore and offshore lenders (collectively, the “Secured Lenders”), made loans under a credit agreement dated October 3, 2017 (“2017 Credit Agreement”) to borrower Delphi Intermediate Healthco, LLC and Delphi Health Holdings, LLC (“old Holdco”) to facilitate the leveraged buyout of legacy Delphi by Halifax.
The remaining balance of the debt due to the Secured Lenders in the amount of $26.5 million was allocated over two credit agreements. The first credit agreement dated April 8, 2020, was between Brightwood, as Administrative Agent, and borrower DR Parent, LLC for term loans in the aggregate principal amount of $12.5 million (the “Holdco Prepetition Credit Agreement”). The second credit agreement dated April 8, 2020, was between Brightwood, as Administrative Agent, and borrower DR Sub, LLC, which borrower obligations were assumed by Delphi Intermediate Healthco, LLC, for term loans in the aggregate principal amount of $14 million (“Senior Prepetition Credit Agreement”).
Brightwood and the Senior Secured Lenders made a total of $23 million in Protective Advances as follows: (i) Initial Protective Advances in the aggregate principal amount of $7,500,000; (ii) Priming Protective Advances in the aggregate principal amount of $10,500,000; and (iii) Super Priming Advances in the aggregate principal amount of $5,000,000, pursuant to the eighth Amendment, each of (i)-(iii) exclusive of interest, fees and other charges for which the Debtors are liable under the Senior Prepetition Credit Agreement.
On the Petition Date, the aggregate outstanding principal amount of obligations due by the Debtors to Brightwood, for the benefit of the Senior Secured Lenders, under the Holdco Prepetition Credit Agreement and the Senior Prepetition Credit Agreement totals $49.5 million, not including interest, fees and costs.
About the Debtors
According to the Debtors: “Delphi Behavioral Health Group was formed to take on the mission of treating addiction at its core. We believe that through personalized treatment in intimate settings, we can provide those suffering from substance abuse with the tools to start a journey of long-lasting recovery. No one should have to battle addiction alone. But we know how hard it is to choose a treatment center that’s right for you. That’s why our dedicated staff is committed to helping you find a treatment program that is ideal for your individual needs. We own and operate a wide range of drug and alcohol detox and treatment centers that are centered on personalized treatment. Our caring staff is trained to handle the challenges that may come with each treatment program. Each of our facilities is staffed by licensed medical and clinical professionals who are dedicated to our treatment philosophy. That philosophy means a commitment to maintaining a low clinician-to-client ratio, state-of-the-art treatment methods, and aftercare services centered on relapse prevention."
Corporate Structure Chart
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