Envision Healthcare is planning to file for chapter 11 bankruptcy protection, according to people familiar with the matter, capping one of the biggest losses ever for the physician-staffing company’s backers at private-equity firm KKR.
The bankruptcy filing, which could be made as soon as this weekend, will wipe out the investment of KKR, which took Envision private in a $5.5 billion buyout in 2018. Including debt, the deal was worth about $10 billion, making it one of KKR’s largest investments in the healthcare industry.
Envision now has around $7 billion of debt outstanding, much of which trades at under 10 cents on the dollar as the company’s finances have steadily deteriorated over the last two years. They have been pressured by high labor costs, a bruising battle with insurer UnitedHealth and federal legislation that took aim at a key component of Envision’s business.
Much of Envision’s debt will be swapped for shares in the reorganized company, the people said.
Envision had been exploring a chapter 11 bankruptcy filing to restructure its debt burden, The Wall Street Journal previously reported. The company missed a March 31 deadline to report quarterly financials and skipped an interest payment due in April, setting the clock on a 30-day grace period before its lenders could push the company into an involuntary bankruptcy.
For KKR, which invested about $3.5 billion in partnership with co-investors into the deal, the loss would be among the steepest in its history. The firm wrote down its $4 billion stake as part of the 2015 bankruptcy of Energy Future Holdings, formerly known as TXU, which it bought in 2007 as part of a consortium of private-equity firms, for $31.8 billion.
The KKR fund Envision is in has already written off the investment and still has a net annualized return of 19%, according to people familiar with the matter.
Bankers and lawyers have been predicting an uptick in bankruptcies this year as companies grapple with sharply higher financing costs and as recession fears mount. Advent International-owned Serta Simmons Bedding filed for chapter 11 in January, citing an inability to refinance debts coming due this year. Private-equity companies tend to pay for their acquisitions by saddling their targets with healthy helpings of debt.
The failure of Envision illustrates the risks of layering debt onto a business in a rapidly changing industry. The company went from generating more than $1 billion in earnings before interest, taxes, depreciation and amortization in the year ended September 2020 to less than $250 million two years later, according to people familiar with the matter.
Other private-equity backed physician-staffing companies, which help hospitals staff emergency rooms and other departments, have also suffered. Bonds due in 2025 for TeamHealth, which Blackstone bought for $3 billion in 2017, are trading at 51 cents on the dollar, according to MarketAxess.
KKR’s loss would be among the steepest in its history.
Envision has faced a litany of problems in recent years. The Covid-19 pandemic caused patients to avoid hospitals, hitting the top line and leading many doctors to leave the profession.
That, along with broader wage inflation, have led labor costs, particularly for anesthesiologists, to skyrocket. Meanwhile, the company has been embroiled in a long-running contract dispute with UnitedHealth over what Envision’s physicians get paid. An independent arbitration panel earlier this month awarded Envision damages of $91 million related to its lawsuit against the insurer over reduced reimbursements for services performed in 2017 and 2018.
Envision and its private-equity owners were also engulfed in a costly public fight over legislation to curb so-called surprise billing, which pitted it and other employers of medical providers against insurance companies. The resulting No Surprises Act bans providers from going after patients for bills their insurers refuse to cover.
Envision had already moved many of its high-margin out-of-network relationships with insurance companies in-network and had adopted a corporate policy prohibiting surprise billing, cutting into the company’s profit.
Envision last year raised an additional $2.6 billion in new debt by stripping its healthier AmSurg surgery-center business away from lenders and providing it as collateral to a small group of creditors led by Centerbridge Partners and Angelo Gordon. It is an increasingly common tactic for distressed companies backed by private equity that can’t raise money elsewhere, thanks to weaker protections in corporate-loan contracts. Many of the companies wind up filing for chapter 11 anyway.
In bankruptcy, the smaller creditor group would be entitled to be paid out before other creditors, improving its chances of a recovery as the company restructures.
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