Medical Lender Files for Chapter 11
National Century Financial Enterprises Inc., which sold at least $3.35 billion of bonds to help finance health-care providers, filed for bankruptcy protection Monday after investors balked at extending credit.
The bankruptcy filing comes two days after the FBI raided the Dublin, Ohio-based company’s offices.
National Century’s collapse may limit the ability of more than 100 health-care firms to meet expenses. Large investors such as Newport Beach-based Pacific Investment Management Co. also face losses.
David Coles, who was brought in from New York restructuring firm Alvarez & Marsal to manage National Century in the near term, said the chances that the company will emerge from bankruptcy protection are remote.
National Century borrowed, via bonds, to buy medical bills from health-care providers at a discount. The difference between what National Century paid for the bills and the amount it eventually collected was used to make interest payments on the bonds and to provide a profit for the company.
The health-care providers, such as PhyAmerica Physicians Group Inc. and Med Diversified Inc., were willing to sell their bills at a discount because they could be provided with an immediate and steady stream of money to meet expenses, including payroll costs. Since 1991, National Century and its units have financed more than $15 billion in health-care claims.
National Century’s failure is rippling through its client ranks. PhyAmerica, which supplies 1,600 emergency-room doctors in 29 states, filed for bankruptcy protection a week ago.
National Century’s arrangements started to unravel over the last month as Moody’s Investors Service cut the credit ratings on more than $3.35 billion of bonds issued by the firm to junk status. Moody’s said the company wrongly tapped into $325 million it had set aside to back the bonds when its own financial situation deteriorated.
The company’s financial problems led it to stop making payments to clients, and its chief executive, Lance Poulsen, resigned Nov. 8.
An FBI spokesman said the company is the subject of a federal probe. Over the weekend, FBI agents filled a rental truck with records from National Century’s headquarters.
The investors in the company’s bonds included some of the biggest institutional investors, including Pimco, Los Angeles-based Capital Research and Management and Alliance Capital Management.
Pimco fund manager Daniel Ivascyn said in an affidavit filed Thursday that Poulsen on Oct. 29 acknowledged making “improper” withdrawals from reserve accounts to pay fees to National Century.
Poulsen “physically ejected” Ivascyn and other bondholder representatives who traveled to National Century’s offices in a converted strip mall, according to the court document. The investors were seeking explanations from Poulsen, the document said.
On Sunday, Pimco said it owned $283 million of National Century’s bonds, or less than one-tenth of 1% of the $401 billion managed by Pimco.
Ambac Financial Group Inc., a major bond insurer, said Monday that it would write down by 70% the $174.5 million in National Century-sponsored debt it owns.
