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June 1, 2023 – Genesis Care Pty Ltd and 53 affiliated debtors (together “Genesis Care*” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case No. 23-90614 (Judge David R. Jones). The Debtors, "a leading integrated cancer care provider in the United States, Australia, Spain, and the United Kingdom," are represented by Matthew D. Cavenaugh of Jackson Walker LLP. Further Board authorized appointments include: (i) Kirkland & Ellis LLP as general bankruptcy counsel, (ii) Alvarez & Marsal as restructuring advisor, (iii) PJT Partners as investment bankers and (iv) Kroll Restructuring Administration as claims agent.
* The Debtors are 36.4% owned by state run China Resources Group and 30% by KKR (which also owns recent Chapter 11 filer Envision Healthcare), see shareholder table below. Both position are interesting, with KKR initially buying a 49.6% stake in the Debtors in 2012, selling that stake in 2016 and then reinvesting in 2018. The state-controlled China Resources Group, or "CR," acquired its stake as part of KKR's 2016 exit, viewed the acquisition as an opportunity "to expand into China where access to cutting-edge therapies–particularly for cancer–lag because of an approval backlog."
The Debtors’ lead petition notes between 50,000 and 100,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn.
In May of 2020, the Debtors closed on their reported $1.5bn acquisition of U.S.- based 21st Century Oncology (itself a bankruptcy survivor, emerging in 2019). Debt incurred to finance that acquisition has proved difficult to refinance in current markets, especially given lackluster operational results at the U.S. subsidiary. The WSJ noted (citing earlier S&P Global downgrades) "rising borrowing costs, sluggish recovery in patient volumes and a slower recovery in the U.S…[and added] ….GenesisCare had $154 million in cash as of September, but its liquidity has been getting worse since then…"
In a press release announcing the filing, the Debtors note that they have embarked on a: "….comprehensive transformation process intended to position the business for long-term growth….As part of the business transformation, GenesisCare intends to explore separation of its U.S. business from its businesses in Australia, Spain, and the UK, creating two platforms. This will enable each of the businesses to grow and operate sustainably and continue to deliver high-quality patient care while maximising value for all stakeholders.
David Young, the recently appointed Chief Executive Officer of GenesisCare, commented "…the past three years have presented significant operational and financial challenges, requiring a comprehensive restructuring of the operations and balance sheet of the company. We are grateful for the demonstration of confidence in our doctors and our underlying business, represented by the commitment of substantial new financing from the lender group."
The press release notes that the the Debtors "have secured commitments, subject to Court approval, for a debtor-in-possession (DIP) financing facility providing US$200 million (A$300 million) in new money from existing lenders to support its business operations. This facility will allow GenesisCare to continue meeting its obligations across the entire enterprise―including to patients, doctors, employees, hospital and health service partners and suppliers―while financially restructuring and reorganising the business."
Goals of the Chapter 11 Filings
According to the Young Declaration (defined below), "Armed with substantial additional capital provided by the DIP Facility, the Debtors have commenced these chapter 11 cases to stabilize their operations and consummate a value-maximizing sale of GC US. In parallel with the GC US sale process, the Company will focus its efforts on stabilizing the RoW business operations by, among other things, reengaging with certain existing lenders to secure sufficient capital to continue to grow the RoW business. The Debtors also intend to use the breathing spell provided by chapter 11 and the liquidity from the DIP Facility to finalize plans to foster growth and stabilize the RoW business and exit these chapter 11 cases with a right-sized balance sheet and a rationalized global footprint."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Young Declaration”), David Young, the Debtors’ chief executive officer, detailed the events leading to Genesis Care’s Chapter 11 filing. The Young Declaration provides: “While the Company has successfully maintained high-quality patient care and a culture of empathy, the integration of 21C into the global GenesisCare business came with operational challenges.
Specifically, the United States arm of the GenesisCare business ('GC US') has faced challenges related to (i) declining revenue cycle management performance that has resulted in lower net collection rates, (ii) antiquated IT and data collection systems that has led to operational inefficiencies, (iii) aged equipment that requires significant capital to replace, (iv) anticipated synergies between the GC US and rest of world businesses failing to materialize and resulting in increased corporate costs, and (v) a slowed demand for services, as well as labor and supply shortages, resulting from the COVID-19 pandemic.
The foregoing, coupled with the Company’s failed attempts to obtain the capital necessary to make investments in the GC US business, has resulted in GC US experiencing declining revenue, higher costs for outsourced services, growing impairment losses and, ultimately, unprofitability as of last year.
Due to the financial state of GC US, the Company’s operations in the United Kingdom, Australia and Spain ('RoW'), which operate at a profit, have been funding GC US’s continued operations. This has strained RoW’s liquidity, leading to RoW taking steps to conserve cash, including delaying payment to its trade partners, which I believe will harm the Company’s relationships with key vendors and suppliers if it continues.
Despite GC US’s strategic and operational challenges, the Company sees a path to profitability for GC US and believes it is poised for an operational turnaround. A new, capable management team has assessed areas for potential improvement and developed a detailed turnaround plan to increase revenues and reduce costs for GC US. But the path to a GC US turnaround will take time and capital, and the GenesisCare enterprise currently does not have the wherewithal to make such investments. Accordingly, the Company determined that it is in the best interest of the Company and its stakeholders to commence a sale of the GC US business to one or more buyers able to implement its long-term strategy. Through these chapter 11 cases, the Company will commence a comprehensive marketing process of its GC US business to potentially identify a strategic partner and maximize value for the Company and its stakeholders.
Taken together, GenesisCare’s investment in unprofitable global initiatives, GC US’s operational challenges, industry and regulatory headwinds and the lingering impacts of COVID-19 have significantly strained the global business’s liquidity. In addition to the GC US business challenges, the Company invested in many global initiatives which have resulted in increased corporate overhead costs without a clear path forward for these projects to deliver a positive cashflow and profit.
In recent months, the Company’s liquidity has reached low levels — most recently as a result of certain of its prepetition lenders refusal to fund approximately AUD $76 million the Company was entitled to draw under its Revolving Credit Facilities. In light of such lenders’ failure to fund, the Company had to consider remaining alternatives to obtain alternative sources of liquidity, including engaging with its stakeholders and third parties and preparing to commence these chapter 11 cases. Ultimately, the Company was unable to obtain out-of-court financing, and the Company now seeks access to a debtor-in-possession financing to (a) continue to operate its business in the near term, (b) rescue the global cost base of the company, (c) run a sale process for the GC US business and (d) maximize the value of the Company.
To assist in exploring alternatives to meet its liquidity needs and, ultimately, preparing for these chapter 11 cases, the Company retained Kirkland & Ellis LLP ('K&E') as counsel, PJT Partners ('PJT') as investment banker and Alvarez & Marsal North America, LLC ('A&M' and, together with K&E and PJT, the 'Advisors') as restructuring advisor in February 2023. The Advisors worked with the Company to evaluate alternatives and determine the best path ahead.
As mentioned, in April 2023, the Company initiated a draw down on its Revolving Credit Facilities under the Company’s Senior Facilities Agreement to fund operations while the Company continued to assess strategic alternatives and engage with stakeholders regarding the same. At this time, the Company had AUD $120.5 million in capacity under the Revolving Credit Facilities — sufficient liquidity to fund operations through at least August 2023. The draw-down requests were funded by nine institutions on a timely basis, but were unfunded by the remaining four of the banks (the 'Defaulting Banks') who held a majority of commitments under the Revolving Credit Facilities without justification, other than requests for voluminous diligence that were not required to be provided under the Senior Facilities Agreement. As a result, the Company received only approximately AUD $44 million — rapidly accelerating the timeline to obtain further financing to fund the Company’s capital-intensive operations and sale process and practically limiting the Company’s alternatives.
Forced to quickly pivot, the Company and its advisors spent the last several weeks engaging with the Company’s existing lenders, including an Ad Hoc Term Lender Group of lenders under the Senior Facilities Agreement represented by Akin Gump Strauss Hauer & Feld LLP and Houlihan Lokey Capital, Inc. (the 'Ad Hoc Term Lender Group') regarding various potential financing transactions in an effort to raise additional liquidity. It became clear, however, that no out-of-court transactions would yield the needed cash infusion quickly and without implementation risk.
To maximize their ability to obtain a financing, the Debtors and their Advisors removed restrictions on trading under the Senior Facility Agreement, provided management presentations and hosted multiple all-lender meetings. As a result, the Company and the Ad Hoc Group determined that the only practical course of action was to commence these chapter 11 cases on an emergency basis to obtain access to critical debtor-in-possession financing to allow the Company to continue operations. With the protections afforded by the chapter 11 process, the Ad Hoc Term Lender Group agreed to provide debtor-in-possession financing to the Debtors.
Specifically, and as described in greater detail in the Singh Declaration and the Fox Declaration, an ad hoc group of lenders under the Senior Facilities Agreement (such members, the 'Backstop Parties') which have agreed to backstop the DIP Commitments and a subset of Consenting Lenders under the Senior Facilities Agreement to be determined following a syndication process to be conducted after the Petition Date will provide an $800 million super-priority, multiple draw debtor-in-possession term loan credit facility (the 'DIP Facility'), consisting of $200 million of new money loans, of which $90 million will be available upon entry of an interim order approving entry into the DIP Facility.
Among other things, the DIP Facility will be used to stabilize the Debtors’ operations, fund payments to certain of the Company’s critical vendors (including non-US vendors), allow the Debtors to run a marketing process and evaluate other strategic alternative for GC US and allow the Debtors to administer these chapter 11 cases."
The Young Declaration continues, "The term sheet documenting the DIP Facility (the 'DIP Term Sheet') also contains certain milestones with respect to the GC US sale process and the plan process for RoW. Specifically, the milestones include:
- Petition Date + 2 business days: Entry of Interim Order;
- Petition Date + 35 days: entry of Final Order;
- Petition Date + 60 days: entry by Bankruptcy Court of an order approving the Disclosure Statement;
- Petition Date + 75 days: filing of a plan of reorganization that provides for the payment in full of all DIP obligations and disclosure statement with respect to an Acceptable Plan with the Bankruptcy Court;
- Plan Filing Date + 130 days: entry by Bankruptcy Court of an order confirming an Acceptable Plan; and
- Plan Filing Date + 150 days: consummation of the Acceptable Plan.
US GC Sale Milestones
- Petition Date + 40 days: delivery of a winddown plan for US GC;
- Petition Date + 45 days: entry of an order approving bidding procedures in respect of US GC;
- Petition Date +110 days: bid deadline for US GC;
- Petition Date + 115 days: commencement of an auction (if necessary);
- Petition Date + 125 days: entry of an order approving the sale of US GC; and
- Petition Date + 145 days: consummation of the sale of US GC.”
The Debtors have approximately $1.7 billion in total funded debt obligations. This consists of approximately (a) $1.547 billion in aggregate principal amount outstanding under the Term Loan B Facilities, (b) $81 million in aggregate principal amount outstanding under the Revolving Credit Facilities and (c) $87 million in aggregate principal amount outstanding under two shareholder loans, as described herein:
Key Prepetition Shareholders
The Debtors' lead petition notes:
- Asia Pacific Healthcare Investments Limited [Hong Kong, this is the China Resources Group affiliate]: 36.4%
- Asia GCMIV Holdings II PTE Ltd. [Singapore, this is the KKR affiliate]: 30.0%
- Doctors and Doctor Entities: 20.0%
- Management and Management Entities: 13.6%
About the Debtors
According to the Debtors: “One of the world's largest integrated oncology networks, GenesisCare includes 300+ locations in the U.S., the UK, Australia, and Spain. With investments in advanced technology and expanded access to clinical trials, more than 5,500 highly trained GenesisCare physicians and support staff offer comprehensive, coordinated care in radiation oncology, medical oncology, hematology, urology, diagnostics, and surgical oncology.“
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