Bankruptcy and Your Center
In all business markets, there is always the risk that a company can start out with the best intentions, make some financial missteps and find themselves standing in the looming shadow of bankruptcy. If placed in this situation, a healthcare company like an urgent care, ambulatory surgery center, or other stand alone clinic has the choice to either file for a Chapter 11 or Chapter 7 bankruptcy. Both come with their pros and cons and The Ambulatory M&A Advisor brings you the information to help you learn the possibilities of each.
For starters, Tim Walsh, partner with McDermott, Will and Emery, and International Head of Restructuring Group explains that a Chapter 11 filing is when a company is looking to reorganize their financial affairs and to come out as a stronger, better, more financially stable enterprise
“Typically, when a company would file, they would file a Chapter 11 with the hope of being able to reorganize. The time to reorganize is usually analyzed on a case by case basis. You can get pressure from your creditors or from the United States Trustees Office to convert a case from a Chapter 11 to a Chapter 7 if it appears that the case is just languishing in Chapter 11 and it appears that there is no likelihood of a successful reorganization,” Walsh says.
Jessica Kenney Bonteque, attorney with the Andante Law Group says that in a Chapter 7, when a company elects to go into it, they no longer are going to be operating that company. At this point in the bankruptcy filing, the rights to the company are granted to a trustee that has all control over that estate. The trustee can make decisions on behalf of the estate, the trustee liquidates the assets of the estate.
“It is a liquidation of the company. If you are a healthcare company, depending on the type of healthcare you provide, there might be different types of assets that would be liquidated, it could be provider contracts, leases, if there is actual real property assets that need to be liquidated, equipment leases etc. Those types of items are liquidated and then the company is dissolved. It is not an option for a healthcare company that wishes to continue to operate,” Bonteque says.
Bonteque says that while the downside of a Chapter 7 is obvious, the downsides of a Chapter 11 exist as well.Bonteque says generally a Chapter 11 is very time consuming and is quite expensive to go through when attempting a true Chapter 11 reorganization.
“The other downside in a Chapter 11 is that unless you pay off your creditors in full, that equity is not allowed to stay in place. Under bankruptcy schemes there is generally a hierarchy of claims. The theory is that if you as an equity holder of this business that requires restructuring are going to maintain the financial benefit of that, you can’t do it at the expense of your creditors. Unless you put in new money or you pay the creditors in full, you can’t retain that equity interest,” Bonteque says.
“On the other hand, if you are in a position where you need to seek that Chapter 11 help, most of the time, that equity value is not going to be there anyways. There are much more positives to a Chapter 11 restructuring than in negatives, if you find yourself where you are defaulted to multiple creditors, or you have a piece of credit that is causing you issues. If you can see in the future that the revenue stream should increase in a way that if you had time, and you could stretch out payments to that creditor then a Chapter 11 is a really excellent way to restructure debt and give yourself time to get things in a manageable position.”
Advantages and to Whom?
Walsh says that there are advantages to both a Chapter 11 and Chapter 7 bankruptcy.
For creditors, Walsh says that the value of a bankruptcy all depends on the value of the assets and how quickly the creditor can be repaid.
“In a Chapter 7, if the value of the assets is significantly below the value of the debt, it may not make a difference to the creditor because they may be only getting paid a small percentage of what they are owed,” Walsh says.
“In a Chapter 11, if there is potential for an ongoing entity, and if you are a creditor that supplies goods and services to that debtor, then you are going to have financial incentive to have that entity reorganize. You, the creditor are going to continue to do business with them. You may also get a more substantial payout on your existing prepetition claim.”
Bobby Guy, shareholder at Polsinelli adds that in a Chapter 7 Bankruptcy, the management walks away from operations and the business usually dissolves after the assets are liquidated. Bonteque says that as far as investors are concerned, they almost always lose the equity involved in the business.
For investors wishing to continue in the business, Bonteque recommends that a business first attempt a Chapter 11.
Buying and Selling During Bankruptcy?
Guy says that the sale of a company in bankruptcy varies based on the filing.
During a Chapter 11 process a buyer is often trying to buy a company as a whole. Sometimes you might try to buy a division or pieces of it or orphan asset, Guy says.
“Generally it is still an operating company. You usually have an active sales process where the company is marketed, bids are brought in and the sales process is very similar to a normal M&A process from a documentation perspective. The difference between a sale of a Chapter 11 and a normal sale is that there is an auction process even when the company has been marketed to buyers and the buyer is selected. The selected buyer is usually called a Stalking Horse. Other people can come in and bid against their price. You go through an active auction process and then sell the company,” Guy says.
“In chapter 7, since the company is liquidated in pieces, it is usually more marketing by equipment brokers and marketing for real estate by a real estate broker, rather than the sale of the company through a large marketing process with a complex asset purchase agreement and an investment banker involved.”
In a Chapter 7, if you have facilities owned by an urgent care, and you file for a Chapter 7 bankruptcy, the company no longer has control over buying and selling of an asset. The trustee makes the decision on how they want to liquidate the facility.
Guy says in this instance a seller could come to the trustee and say “I have this LOI and I think it’s a really great option,” but at the end of the day, the trustee is the one that makes the decision about how those assets are administered.
“In a Chapter 11 process, assuming you are a debtor in possession. You can operate to the ordinary course. Bankruptcy code provision 363 allows for a sale of bankruptcy estate assets. If you had a buyer lined up or through a marketing process, were able to get a buyer, you would file a motion with the court and the parties in interest would have the opportunity to object and say whether or not this sale is in the best interest of the estate. If this facility has a lien against it, two things can happen, the entity may consent, or can be sold free and clear if the offer is above the debt in question,” Bonteque says.
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