Dive Brief:
- U.S. senators for Massachusetts sent letters late last week to half a dozen of Steward Health Care’s lenders urging them modify loan terms rather than “continue squeezing Steward” as time runs out for the embattled health system to meet its April 30 payment deadline and avoid bankruptcy.
- Sens. Elizabeth Warren and Edward Markey warned that a Steward bankruptcy and further closures of Massachusetts hospitals would be devastating for patients.
- The private credit firms — Sound Point Capital Management, Oaktree Capital Management, WhiteHawk Capital Partners, Owl Creek Asset Management, MidOcean Credit Partners and Brigade Capital Management — have backed up to $750 million in loans to indebted Steward spread across two transactions, according to the letters.
Dive Insight:
Steward, which operates eight hospitals in Massachusetts, has allegedly racked up hundreds of millions in debt in missed payments to vendors and its landlord, Medical Properties Trust.
However, the bulk of Steward’s debt is owed to a consortium of private lenders that have issued the health system two recent large loans — one $600 million loan last summer to refinance prior debt and a second $150 million bridge loan in January — to keep it afloat, according to the senators.
The lenders gave Steward a deadline of April 30 to begin to settle up its debts. However, experts say the cash-strapped healthcare operator, which operates more than 30 hospitals across eight states, is at imminent risk of defaulting on its loans and filing for bankruptcy.
The terms of the consortium’s loans to Steward have not been released. In the letters, Warren and Markey pressed for details about lending rates, default provisions and due diligence conducted on Steward prior to lending.
If Steward’s loan terms are typical of those seen across the private lending space, the deals could be exacerbating Steward’s financial hardship, according to the letters.
The senators allege private lenders hike up lending terms relative to public lenders, charging more than 6 percentage points more than banks offering comparable deals. Private lenders often also charge distressed borrowers, like Steward, higher management fees and other expenses, they wrote.
Meanwhile, private credit became a $1.7 trillion industry last year, according to data from the Federal Reserve. The senators argued the powerful lenders could exercise options to alleviate financial stress on Steward.
“As one of the largest holders of Steward’s debt, you have the power to help keep those hospitals open and preserve access to care for communities in Massachusetts,” the senators wrote.
They did not specify how lenders should modify loan terms. Warren and Markey asked the lenders to respond by April 26.
Executives for Steward’s landlord, MPT — which financed $60 million of the January loan — said in a February earnings call that the private consortium had considered extending Steward’s credit line past April.
Additional funding would be tied to Steward hitting “relatively stringent milestones” related to retenanting some of its hospitals and selling its physician group, according to MPT CFO Steven Hamner.
Steward announced a possible deal to sell its physician group, Stewardship Health, late last month to UnitedHealth subsidiary Optum. However, the sale does not have an expected closing date and state regulators had not begun reviewing the deal as of mid-April. Steward has also not announced the sale of any of its hospital operations.
Lenders have become wary of backing highly leveraged companies, according to a November report from credit agency Moody’s Ratings sent to Healthcare Dive. The agency said more healthcare defaults would occur this year due to excessive leverage, elevated interest rates and expiring interest rate hedges.
Leveraged finance analysts from credit rating agency Fitch Ratings agreed, adding that highly leveraged businesses with limited cash flow cannot sustain current interest rates.
“The math doesn't work,” said Britton Costa, managing director and head of healthcare and pharma at Fitch. “In the interim, that remaining free cash flow is going out to pay interest expense, but it also does not allow for any cash flow to repay debt and try to put themselves in a better position ahead of refinancing.”
