Private equity goes into debt to draw liquidity from healthcare companies
Healthcare companies are increasingly taking on debt to pay dividends to their private equity owners, just a year after the start of a pandemic that plunged the industry into crisis.
At least five U.S. healthcare companies have borrowed heavily in part to fund hundreds of millions of dollars of those first-quarter payments, according to a report released Wednesday by the nonprofit Private Equity Stakeholder Project.
The practice, known as dividend recapitalization, is gaining momentum as investors seek yield with interest rates close to all-time lows. Meanwhile, healthcare businesses are on more solid footing, with patient visits rebounding and the government releasing an economic stimulus.
Healthcare companies have already borrowed about $ 3.7 billion in 2021, in part to fund payments to private equity owners, more than double the amount issued all last year, according to data from S&P Global Market Intelligence. At the current rate, this would be the industry’s busiest year for borrowing since 2015.
“Investor demand for leveraged loans has outstripped supply so far this year, causing prices to skyrocket in the secondary market,” said Marina Lukatsky, senior manager of S&P.
Dividend recapitalization is one of the reasons high net worth investors are drawn to private equity because they don’t have to wait years for a payout.
The leading private equity lobby group, the American Investment Council, defended practice, arguing that loans are made to financially strong companies and help retirees because public pension plans are among the clients of private equity funds. Dividend recapitalizations only made up 6% of the total leveraged loan market last year, the trade group said, citing data from S&P.
But critics, including the Private Equity Stakeholder Project, say the strategy destroys value.
“By forcing companies to go into debt to extract cash for themselves, private equity firms expose these firms to the risk of restructuring, bankruptcy, or cost reduction to offset interest payments and repay that debt. debt, ”said Eileen O’Grady, coordinator of the nonprofit.
The report singled out two privately owned healthcare companies: DuPage Medical Group, a network of more than 750 physicians in the Chicago area, and the Mentor Network, which treats children and adults with developmental disabilities.
DuPage, which received about $ 80 million in grants and loans from taxpayers in 2020, distributed $ 209 million this year to homeowners, including Ares Management, using the remaining cash from the sale of some office buildings and additional debt, according to Moody’s Investors Service.
The distribution is “negative credit because it underscores the aggressive nature of DuPage’s financial policies,” Moody’s analysts wrote in a report. “Combined with higher gross financial leverage, this will leave DuPage more weakly positioned to absorb any unforeseen operational setbacks or additional debt.”
The company plans to repay government loans and use the grants only to offset lost revenue and costs related to the pandemic, DuPage spokeswoman Maria McGowan said.
“Our recent refinancing allowed us to further strengthen our balance sheet, reduce our interest costs and take advantage of positive market conditions,” she said.
The Mentor Network, meanwhile, took on more debt and distributed $ 375 million to its owners – the second dividend since it was acquired two years ago by Centerbridge Partners and Vistria Group.
While Moody’s warned of high leverage, it said the company has enough cash to meet its obligations.
In December, the Senate Finance Committee reported findings from investigations with two Mentor Network affiliates alleging inadequate patient care and failure to report incidents of abuse and neglect.
A company spokesperson declined to comment.