Debt Bedevils Care Enterprises’ Outlook

What’s the prognosis for Care Enterprises, which last week said it would post a big loss for 1986?

Putting the question to securities analysts who still follow the ailing Laguna Hills-based company resulted in a wide range of possibilities.

The company, which went public in 1983, is the nation’s fourth-largest publicly traded nursing home operator, with 124 nursing homes in seven states. But in getting there, the company ran up a mountain of debt.

As a result, profits kept shrinking and now appear to have vanished altogether. Care Enterprises said Wednesday that it expects to report a $9.8-million net loss for 1986. In 1985, it had $3.6 million in net earnings.

As previously reported, the company said the bulk of that anticipated loss--$7.4 million--is set aside in a reserve related to a dispute with the owners of several nursing homes it operates.

Care Enterprises’ long-term debt totals about $160 million, including $68 million in Drexel Burnham Lambert-underwritten junk bonds that the company issued in 1984-85 to finance acquisitions, said Derwin Williams, its chief financial officer.

The company also owes another $15 million in short-term bank borrowings, $14.2 million of which is due June 30, he said. Crunched for cash--Care had just $1.4 million in cash at the end of September, the last period for which figures are available--the company needs either to refinance that debt or find a new lender.

Because of the planned refinancing, the company said its auditors will qualify their opinion of the company’s 1986 financial statements, usually a good indicator that things are not as rosy as they could be.

Still, Care Enterprises is optimistic it will obtain new bank financing. Williams said in an interview last week he hopes that will happen within the next 30 days. In fact, he said, the company hopes to borrow $45 million to $60 million more for working capital and the like.

But some analysts said Care Enterprises is a lot like many consumers these days whose houses are mortgaged to the hilt, whose credit cards are all used up and and whose paychecks don’t seem to stretch quite far enough.

“It really makes you wonder how viable the company is because they don’t have many reserves,” said Jules Marx, health-care analyst for the New York investment bank of D.H. Blair & Co. Inc.

As Care Enterprises’ fortunes have eroded, so has its stock price.

The company’s Class B common stock--which has full voting rights--closed Friday on the American Exchange at $4 a share, about midway between its 12-month high of $7.75 a share and its low of $2.875 a share. Care’s Class A common--which has one-tenth of a vote per share--closed at its 12-month low of $2.875 a share.

Marx--who said he doesn’t bother to issue earnings estimates anymore because Care Enterprises is losing money anyway--said buying Care junk bonds is probably a better investment than buying its stock these days.

“The equity is a crapshoot,” he said, explaining that the bondholders stand a better chance of a return than do the shareholders in a liquidation of the company’s assets.

Peter Sidoti, an analyst for Drexel Burnham, was a little more optimistic.

Care Enterprises stands a good chance of making a profit during 1987 if it can cut its costs enough and refinance its bank debt, Sidoti said. Still, he won’t issue any earnings estimates until after Care reports its 1986 results.

A third analyst, Larry Selwitz of Los Angeles-based Bateman Eichler, Hill Richards Inc., raised the possibility that Care could eventually be the subject of a takeover bid.

Although a buyer for Care probably would not be hard to find, Selwitz said a potential stumbling block to an acquisition of the company is the feud between Lee Bangerter, Care Enterprises’ chairman; his brother, Dee, and their half-brother, Ted Nelson. Each owns about 20% of the company’s stock.

A purchase offer, Selwitz speculated, could set off a bidding war between the two factions: “My suspicion is that there are a lot of interested parties.”

But if a buyer “went to Bangerter, Nelson would try to block him,” he said. “If he went to Nelson, Bangerter probably would try to block him.”