The SeniorCare Investor: Genesis, Multicare and "Baby Mariner" File Reorg Plans

As we disclosed in last month’s elert, Genesis Health Ventures (OTCBB: GHVIQ), The Multicare Companies and the Mariner Health Group (Baby Mariner) have all filed reorganization plans with expectations of emerging from bankruptcy by the end of the year. There is still no word from Mariner Post-Acute Network (OTCBB: MPANQ) regarding the timing of its reorganization plan.

When Paragon Health Network purchased Mariner Health Group in the summer of 1998, subsequently changing the name of the merged entity to Mariner Post-Acute Network, Baby Mariner became a subsidiary of MPANQ and kept its bank group intact and separate from the parent company. Consequently, when Baby Mariner and its parent filed for bankruptcy protection in January 2000, two different creditor groups had to sort out what to do. Baby Mariner’s senior creditors have decided to take their chances and go their separate way.

Baby Mariner’s senior lenders, who had a total of approximately $440 million of debt, will receive $50 million of new senior notes, $48 million of new subordinated notes and 80% of the newly issued common stock, according to the filed plan. Goldman Sachs Credit Partners, L.P. and First Union National Bank own a combined 52% of the senior debt, with 11 other lenders or investors owning the rest. Goldman and First Union should end up with about 42% of the common stock.

According to the preliminary reorganization plan, 20% of the new common stock is being reserved for a new management company that the creditors will hire. Obviously, this will put management’s interests in line with the creditors, which is always reasonable when creditors own 80% of the company. Rumor has it that Maryland-based Capella Senior Living will be tapped by the creditors to take over. This makes a lot of sense since the CEO of Capella, Paul Diaz, became the COO of Baby Mariner after he sold his company (Allegis Health Services) to Baby Mariner in October 1996 and he knows the assets quite well. He also has a very good reputation in the industry. In addition, his CFO, David Hansen, is the former CFO of Baby Mariner, and also on board is Baby Mariner’s former CIO, Fran Hinckley.

We believe that the current plan is to keep Baby Mariner private for at least a few years until 1) liability insurance costs are under control, 2) new management can enhance operations and increase margins and 3) the equity markets improve. Baby Mariner currently operates 72 nursing facilities and one rehab hospital with a total of 9,864 beds in 14 states. A third of the beds are in Florida, and nearly 40% are in Maryland and Texas. Only eight of the facilities are leased and nine are subject to mortgages, which leaves seven that are operated under joint ventures and 49 that are owned and unencumbered.

If one uses an average price per bed of $40,000, these 49 facilities could have a value close to $250 million, if not more after the liability issue gets resolved. What this means is that there is significant value with just $100 million of combined new debt (excluding the $48.4 million of mortgage debt on the nine mortgaged properties). In 2000, Baby Mariner had EBITDAR of $49.5 million on revenue of $528.6 million, or a 9.4% margin. Based on these historical results, combined with a new capital structure, this could translate into a debt and lease coverage ratio of close to 1.8x. The increased cost of liability insurance, however, will probably take this even lower. Occupancy last year was 88%, and 52% of revenues were from Medicare and private pay, compared to 56% and 64% in 1999 and 1998, respectively. The senior creditors are smart to start anew with a reasonable capital structure and let the equity value ride the wave of a new management team. Unfortunately, when Baby Mariner emerges as a private company, we will not be able to track that increasing value.

Over the last several months there was a growing consensus that Genesis would shed the Multicare assets as part of its reorganization plan. After all, the acquisition of Multicare in 1997 with Texas Pacific Group (TPG) and the Cyprus Group (CG) helped seal the ultimate fate of Genesis. What many of us underestimated is how important the Multicare facilities are to the pharmacy and rehab businesses of Genesis. One has only to look at the difficulty Beverly Enterprises (NYSE: BEV) is having parting with its Florida operations (see Acquisition Market).

At the time of the bankruptcy filings, Genesis had $2.3 billion of debt and Multicare $947 million. Under the proposed capital structure, with Multicare becoming a wholly-owned subsidiary (now it is just 43.6% owned by Genesis), there will be $246 million of new senior notes and $42.6 million of new convertible preferred stock. GHVIQ’s senior lenders will end up with 74.6% of the reorganized company’s common stock, while Multicare’s senior lenders will receive 21.3% of the new common.

The big losers, in addition to the creditors, were TPG and CG, both of which invested quite heavily in the company, as well as management and other employees who had stock and options, all of which became worthless. It is interesting to note that this reorganization plan was filed just one year after the original bankruptcy filings, much faster than the 18 months for Baby Mariner and about the same period of time as Vencor/Kindred Healthcare (OTCBB: KIND).

Not much has been heard regarding the timing of a reorganization plan for MPANQ, Integrated Health Services (OTCBB: IHSVQ) or Sun Healthcare (OTCBB: SHGE). The only news from IHSVQ is that its CFO, Taylor Pickett, left to become the CEO of Omega Healthcare Investors (NYSE: OHI) effective June 12. From what we hear in the market, Mr. Pickett was spending most of his time at IHSVQ on its RoTech subsidiary, which may be the only part of the company contributing to the bottom line.

The only news out of Sun Healthcare is that the company filed a motion to sell its German operations and that it is fighting with Meditrust (now La Quinta Properties, NYSE: LQI) over the divestiture of two properties that, combined, are producing a negative annualized EBITDA of $3.6 million, based on the first six months of 2000. LQI is fighting the motion because the two properties, originally owned by Mediplex, are in a leased group of more profitable facilities. When the former Meditrust consented to the acquisition of Mediplex by Sun, the cross-default provisions put in place were specifically designed to protect the landlord from cherry-picking by a financially distressed tenant. The problem for Sun is that many of its leases with the former Meditrust are profitable, and it does not want to reject the entire lot. This is a complicated legal issue and may take a while to sort out. Consequently, a plan of reorganization can not be expected in the near future, and a liquidation of the company still is a possibility. Andy Turner, stand by.