HPE Miami Healthcare Financing Deals 2022: Strategies for the Year Ahead
In this session, Stephanie McCann, Partner and Co-Head of McDermott’s Finance Practice, led an in-depth discussion on key strategies investors should consider when seeking sources of capital to fund healthcare transactions. health. Session panelists included:
- Javier Casillas, Chief Credit Officer and Managing Director, WhiteHorse Finance
- Matthew Evans, Managing Director, Head of Healthcare Financing, Monroe Capital
- Scott Gallin, Partner, Linden Capital Partners
- Aman Malik, Managing Director, HPS Investment Partners
- Bryan Rupprecht, Managing Director and Head of Healthcare, MidCap Financial
The panel’s top takeaways included:
1. Although 2021 has not been without problems, the first quarter of 2022 has already provided a long list of challenges for healthcare markets: geopolitical uncertainty (including US and global sanctions against Russia), rising rates interest rates, rising prices for energy and other goods and services, the ongoing COVID disruptions and the LIBOR transition, to name a few. Despite the expected bumps, Scott Gallin noted that his company “absolutely expects 2022 to be as busy as the past two years.” With many companies entering the market, Gallin noted, “we’re lucky that healthcare, despite all of these macro pressures, is still quite resilient.” He added, “We just need to incorporate these macro vectors into our models to make sure we’re doing strong underwriting.”
2. The energy industry may seem separate from the healthcare industry, but, Aman Malik said, rising fuel prices will impact certain businesses such as home healthcare services. “The reimbursement does not adapt immediately,” he noted, it is usually fixed at the beginning of the year. Regarding inflation, Malik said: “If interest rates go up one point and growth slows down a bit, you’re going to find yourself in a world where interest payments and everything could be [an issue].” On the pay rise, Bryan Rupprecht said: “I would point out that there are certain sub-sectors, for example qualified nursing homes, where the model literally won’t work. Salaries are such a high percentage of total costs that when the pandemic is over and they stop getting the increased payments from the government and they have this new cost structure, every nursing home in the country is bankrupt .
3. Stephanie McCann noted a number of issues for underwriters to consider, including timing and due diligence, loan-to-value (i.e. purchase price), backed options by sponsors versus non-sponsored options, sector/industry differentiation, and asked panelists what their position was. thoughts. From the perspective of the investment committee, Javier Casillas said: “Besides obvious credit criteria, we focus on the enterprise value of the company, its resilience and its sustainability.” Rupprecht added: “What is unique to today, compared to history, is the COVID bump thing. Every company we invest in is doing very well, management teams and investment companies are saying ‘this is the new normal’, while companies that are not doing well are ‘saying’ This is a blow COVID and we’re going to bounce back as soon as COVID is over.’”
4. McCann asked about EBITDA adjustments and valuation of the business and wondered if the panelists had taken into account whether or not the business was backed by a sponsor, and s There was a leniency for sponsor-backed companies. Casillas pointed out that there is now a third category: independent sponsors. “We find it to be a very successful and interesting place to play. You have a lot of institutional sponsors who have created funds that have very smart and experienced people buying companies, and there are some good deals there. and there are good fits – we are very active in this market. Matthew Evans noted that “at the end of the day, if you have the majority of your underwritten EBITDA in fit, there must still be cash flow to point in time.” He said his company is looking at “13-week cash flow at closing to ensure we have cash to repay debt.”
5. Asked about the growing trend of lenders going capless, Rupprecht noted that a large majority of deals don’t have covenants. “These companies are going to run out of money before they break an alliance,” he said, “that’s just plain reality. What we try to do is keep the revolvers small, because a) they’re extremely expensive for us, and b) when you run out of money, we don’t want you going to hit a 40 million revolver dollars and keep bleeding this company for the next two years because I know you’re not going to break the covenant.
6. At the mid-cap level, Rupprecht said, regulatory enforcement and qui tam issues have traditionally been a major concern, but that was not unique to the healthcare environment. The big challenge today, he said, is “trying to figure out what the new normal is.” He mentioned telehealth as something that’s here to stay, but added that not all companies have seen revenue growth during the pandemic. Gallin elaborated on the new normal and wondered if some of the shifts in consumer behavior were solely the result of the pandemic, or due to better marketing or information sharing. Evans noted that underwriting processes have sped up and deals are negotiated very quickly — a compression of timelines that makes it very difficult to conduct proper due diligence, and a problem that doesn’t seem to be going away anytime soon.