The Last Great Debt Restructuring Of The Financial Crisis Is A £1.5B Nightmare

At this point more people are looking ahead to how and when the next downturn might arrive than looking back at the last one.

But there is still one major U.K. debt restructuring left over from the last crisis. It is huge, complex and has serious implications.

The restructuring in question relates to private hospital company General Healthcare Group, and its woes epitomise the complex financial engineering of the last cycle.

In 2006 South African healthcare firm Netcare, buyout firm Apax and property investors London & Regional and Brockton Capital bought GHG for £2.35B. L&R took 8% of the deal and Brockton 3%. They split it into a property company which owned 35 hospitals valued at around £2.1B and an operating company called BMI Healthcare, owned by Netcare, which leased them back and ran them.

Debt of £1.6B was secured against the properties and some of it was then securitised. That debt was due to mature in 2013, but post 2008 a perfect storm occurred: The operating income of BMI dropped as the U.K. healthcare market suffered from government cuts and falling revenue; and the value of the portfolio decreased to £1.8B. That made refinancing the debt impossible, especially since the structure of the deal was incredibly complicated: There were two separate securitisations, other senior loans plus junior loans, adding up to 16 different lenders. 

A restructuring was eventually agreed in 2015. It extended the maturity of the loans to April 2019 and converted an onerous interest rate swap into yet more senior debt. A group of hedge funds including KKR, De Shaw and Centrebridge, which had bought into the  debt during the restructuring, took over from Apax, Netcare and London & Regional as the owner of the properties. Brockton had sold its stake to Netcare in 2011.

But crucially, during that restructuring no deal could be reached to reduce the rent paid by the operating company to the owners of the property, something Netcare, the ultimate operator of the hospitals, said was necessary to make its business viable.

Now the clock is ticking for a rent reduction to be agreed. It is less than a year until the loans mature again, and in March Netcare said it was pulling out of the U.K. because its rising rent payments — they increase by a fixed 2.5% a year — made it impossible to make a decent return from BMI.

It is selling BMI but in the meantime the business is surviving because it is receiving short-term funding from lenders. The rent accounts for 20% of BMI’s revenue, a figure Netcare described as “unsustainable”.

An announcement by the servicer managing the two securitisations said late last month that talks had commenced on a potential reduction in rent, with Lazard appointed to advise bondholders on the proceedings.

But this will be far from simple. The owners of the properties, the hedge funds, have to pay interest on the £1.5B of debt that is still outstanding, so can’t accept too big a cut in rent. They also have to refinance the loans in less than a year, and need as much income as possible to make the prospect of a refinancing appealing to potential future lenders.

At the same time, if they don’t agree to rent reductions, there could be a chance that BMI cannot continue to run its operations and uses a company voluntary arrangement to break leases or even goes into administration, both of which would put even greater proportion of the rental payments at risk.

And any rent reduction or restructuring needs to be agreed by that cohort of 16 different lenders, all of whom will have differing views and agendas.

Distress in healthcare property is particularly evocative and high profile, given the sensitive nature of what the property is used for, further adding to an already huge list of complications.