Faced with a mountain of debt, private hospital operator Healthscope has called on KordaMentha to help keep the lights on and restructuring the business.
By bringing the insolvency experts in now, Healthscope management hopes the hospital operator can avoid a similar fate to that awaiting Star Entertainment Group, which could enter administration soon.
In addition to $1.6 billion in debt, the company’s financial problems can be attributed to insufficient earnings, plus insufficient hard assets that could potentially be offloaded to generate working capital.
Acquired by the private equity arm of Canadian investment giant Brookfield in 2019, the company’s financial predicament is exacerbated by the role it plays as Australia’s second-largest private hospital operator which services the daily health needs of countless Australians.
Contingency plans
The company has appointed KordaMentha to prepare a contingency plan if it is placed into voluntary administration.
However, given that the company has already negotiated with its lenders, these contingencies may be too little too late.
It’s no secret that the company has previously warned it may have breached the conditions of those loans.
As specialists in restructuring and insolvency KordaMentha is currently administering the collapsed Whyalla steelworks, in preparation for any possible voluntary administration.
While neither Healthscope nor KordaMentha comment at this stage, it’s understood ASX-listed HMC Capital’s (ASX: HMC) David Di Pilla has publicly expressed interest in acquiring Healthscope’s operations.
However, at a recent business summit, Di Pilla stated that the funding model for private hospitals in Australia was broken, not well regulated and failing patients.
“The transmission mechanism from taxpayers paying private health insurers an amount of premium and the transmission mechanism for that money to end up in the hands of operators and ultimately into better services for patients is broken and needs to be fixed,” Di Pilla said.
“We have an expectation of what has to happen in terms of delivery of the service, but this bit in the middle is unregulated. It needs to be tightened up and there needs to be a better transmission system.”
Breach notices
Ironically, the company recently received breach notices for 11 of its 38 hospitals after failing to pay rent to its landlord, HealthCo Healthcare & Wellness REIT. This is an investment vehicle run by Di Pilla’s HMC Capital.
HealthCo Healthcare is in active discussions with alternative hospital operators, but declined to provide details.
Meanwhile, Healthscope has not breached its rent obligation to its other major landlord, Toronto-listed Northwest Healthcare Properties Real Estate Investment Trust - which as owner of 12 of its hospitals - agreed to provide some rent relief for March.
It’s understood that a recent review of the sector released by Health Minister Mark Butler revealed that margins at private hospitals had almost halved in five years. This was due to costs rising faster than revenue.
The review flagged the likely closure of more hospitals without urgent government help.
The company's shares tumbled 6.7% to 90 cents after it issued breach notices to Healthscope for failing to pay all rent due in March.
HMC Capital has a market cap of $3.5 billion making it an ASX200 stock; the share price is up 22% in one year and down 13% year to date.