Unpaid Bondholders Push Care Enterprises Toward Bankruptcy
Care Enterprises, the troubled Tustin-based nursing home company, is being pushed toward bankruptcy by bondholders who refuse to accept the terms of a $68-million bond refinancing package that would suspend already overdue interest payments for one year.
Passage of the financing package would appear to be crucial for Care Enterprises’ survival, since it has also been unable to meet the terms on part of its $35 million in bank loans.
The bank lenders, Wells Fargo and Citibank, are apparently pinning their willingness to renegotiate the bank loans on the company’s ability to get its bond financing in order, according to George Friedman, a broker with Milwaukee Co., a Milwaukee brokerage that represents 5% of the bondholders.
“It seems that the company is already operating in a state of quasi-bankruptcy right now,” Friedman said. “They missed repayment on $5 million in bank loans and they are certainly not paying the bondholders.”
The fate of Care Enterprises could be determined by R.D. Smith, a New York brokerage house that specializes in buying debt of bankrupt and near-bankrupt companies and which claims to represent 29% of the holders of a $51-million bond issue. Care has a second bond issue outstanding that totals $17 million.
Care Enterprises failed to make interest payments last December on the bonds. As a result, earlier this month R.D. Smith requested payment in full of principal and interest.
Under the terms of the bond indenture, any group representing 25% or more of the bondholders can demand immediate repayment of the bonds if the company misses an interest payment.
Meeting R.D. Smith’s request would effectively force Care Enterprises into bankruptcy because the company lacks the cash or borrowing capacity to make the payment.
‘A Pretty Serious Act’
According to Friedman, the company responded to the request by saying that R.D. Smith does not actually represent 25% of the bondholders and has delayed meeting the terms of the indenture.
Both Care Enterprises and R.D. Smith refused to comment on the dispute, but other Wall Street “workout” experts who specialize in the bonds of companies in Chapter 11 bankruptcy proceedings said it would be highly unlikely for R.D. Smith to misrepresent itself.
“Forcing a company into bankruptcy is a pretty serious act,” said Wilbur Ross, a senior managing director for the New York firm of Rothschild Inc., which has represented bond and equity holders of such bankrupt companies as Texaco and Continental Airlines.
Ross also noted that it is highly probable that R.D. Smith has a financial interest in seeing Care Enterprises forced into bankruptcy.
By buying Care Enterprises’ debt at a discount, and selling at a higher price after the company has been reorganized under Chapter 11, R.D. Smith could make a quick gain on its investment, a technique that it and other Chapter 11 experts have used often in the past.
For instance, R.D. Smith is best known for its success in doubling in eight months its $10-million investment in Dart Drugstores, a Washington-based drugstore chain that defaulted on $160 million of bonds last year, according to Ross.
Care Enterprises, which runs 105 skilled nursing homes, has experienced serious trouble in recent years, sustaining huge losses in 1986 and 1987. Last April, on the same day it reported a $10-million dollar loss for 1986, the company’s president, Boyd W. Hendrickson, resigned. In March, Care became the subject of several takeover attempts, including one by Chairman Lee Roy Bangerter’s half brother, Ted D. Nelson.
The Columbus, Ohio-based Paradigm Co. has offered to purchase 26 Care Enterprises nursing facilities for $66.2 million, including $18.7 million in cash. Care has charged that the offer is an attempt by Paradigm founder Ralph Hazelbaker to take unfair advantage of Care’s financial predicament.
Care’s losses have sent the company scrambling for extensions from its bankers and bondholders since last July, when the company secured a crucial, eight-month extension on $14.2 million of bank loans.
Principal Not Repaid
After missing an interest payment on bonds in December, the company was granted another bank loan extension in January when it again failed to make an interest payment--this time for $5 million on bank loans.
Care Enterprises’ only apparent alternative to bankruptcy is to persuade 75% of the bondholders to accept the terms of a debt swap offer. If it cannot, its bank lenders will refuse to negotiate further extensions of $35 million in senior bank loans, according to Friedman.
The company has been negotiating with the banks since November and has already missed principal repayment on $5 million of the loans. So far, only about 20% of the bondholders have been persuaded to go along with the package.
The package would require bondholders to forgo interest payments through January, 1989. In return, they would receive an additional 10% of principal and would have the option to sell bonds at face value in 1998, as opposed to the original maturity date of 2002.
“Their offer does not seem generous to us,” Friedman said. “What reason do the bondholders have to believe that there will not be a problem next January? What evidence is there that the company will be run smoothly for the next year? Management has waited right to the end to negotiate--this hasn’t been handled in a very efficient manner.”
Before accepting the refinancing package, the second since Care Enterprises failed to make interest payments in December, bondholders would like to see at least one of several demands met, according to Friedman, who says he has discussed the matter widely with other bondholder groups, including R.D. Smith and Boston-based Fidelity Funds, another major bondholder.
Specifically, bondholders are looking for voting control of a percentage of the stock, a cap on senior management’s salary and ownership of a portion of the company’s assets. Another option, according to Ross, would be to give bondholders equity in the company along with the refinancing package. “They’re being asked to take an equity risk, so bondholders should get an equity play,” he said.
Drexel Burnham Lambert, which is Care Enterprises’ financial adviser on the exchange offer, declined to comment on the bondholders’ demands.
A YEAR OF TURMOIL
March, 1987: Care Enterprises fends off a takeover attempt by Chairman Lee Roy Bangerter’s half brother, Ted D. Nelson.
April: The company reports a $10-million loss. President Boyd W. Hendrickson resigns.
May: Dallas-based Southland Corp. makes an unsuccessful takeover bid for Care Enterprises.
July: Unable to make interest payments on bank loans, the company receives an eight-month extension on a deadline to repay $14.2 million in bank debt.
November: The company enters into negotiations with bondholders on refinancing $68 million of subordinated debt.
December: Care Enterprises misses an interest payment on $68 million of bonds.
January, 1988: Bankers grant a two-week extension on a $5-million interest payment.
February: R.D. Smith, claiming to represent 29% of the company’s bondholders, demands immediate repayment of principal and interest under the terms of the bond indenture.