Opinion ID: 2929108
Heading Depth: 2
Heading Rank: 1

Heading: LifeCare’s Business Troubles

Text: At the start of 2012, LifeCare Holdings, Inc. (“LifeCare”),1 once a leading operator of long-term acute care hospitals, was struggling financially. Management blamed its condition on Hurricane Katrina’s destruction of three of the company’s facilities and growth-stunting federal regulations that followed the 2005 natural disaster. Because of the weight of its debt load ($484 million, of which approximately $355 million was secured), new capital was hard to find. As a result, management considered two transactions that would salvage it as a going concern: a sale or a restructuring of its balance sheet. The sale didn’t happen initially because none of LifeCare’s suitors (there were at least seven of them) offered an amount that exceeded its debt obligations. The best offer—submitted by one of LifeCare’s biggest competitors— reflected a recovery to the secured lenders of only 80-85%. Management considered that option inadequate and thus was left with the restructuring alternative. To go that route, however, it needed the support of its secured lenders. But they had another idea. Rather than support a restructuring of 1 LifeCare while in Chapter 11 was referred to as “LCI.” Per its plan of reorganization it became “ICL.” Hence we simply use the term “LifeCare.” 6 LifeCare’s balance sheet, the secured lenders wanted to purchase the company outright—that is, all of its cash and assets. To that end, they offered to credit $320 million of the $355 million debt they were then owed. Because their credit bid was LifeCare’s best (and only) alternative to liquidation under Chapter 7, the company agreed to part with all of its assets, including cash. To memorialize the proposed sale, the secured lender group (through an acquisition vehicle called Hospital Acquisition, LLC2) entered into an Asset Purchase Agreement with LifeCare in December 2012. In addition to its credit bid, the purchaser agreed to pay the legal and accounting fees of LifeCare and the Committee of Unsecured Creditors (the “Committee”) and to pick up the tab for the company’s wind-down costs. Because the professionals hadn’t completed their work, the agreement directed the purchaser to deposit cash funds into separate escrow accounts. Any money that went unspent had to be returned to it.