Genesis/Multicare Bankruptcy News: Talks with Lenders

By Elise Nakhnikian

The other shoe may be ready to drop for Genesis Health Ventures Inc., rumors of whose impending bankruptcy last year proved premature—but perhaps not altogether wrong.

Press releases issued yesterday by Genesis and by its 43.6 percent owned affiliate, The Multicare Companies, Inc., announced that both had begun discussions with key lenders to revise their capital structures. Neither company expects to make scheduled interest and principal payments on senior debt or interest payments on subordinated debt during the 60-day grace period granted by their senior credit lenders, which will expire May 19.

Kennett Square, Pennsylvania-based Genesis, which provides skilled nursing and assisted living in the eastern United States and long term care support services nationwide, defaulted on a $3.8 million interest payment under a senior credit agreement that was due Monday. As of the end of last year, the company reported that it had a total of $1.5 billion in outstanding debt.

Multicare, a provider of assisted living and skilled nursing in the northeast that was acquired by Genesis and two financial partners in October 1997, has not yet failed to make an interest or principal payment. However, it announce, it does not expect to make its next senior bank debt payment, which is scheduled for March 29. The company reported $774 million worth of debt as of December 31, 1999.

Both companies attributed their difficulties to "an indefinite delay in asset sales due to a lack of available financing in the long term care market coupled with the continuing effect of reduced Medicare payments."

In response to the news, Moody's Investors Service downgraded its ratings for both companies. In a press release that called their ratings outlook negative, Moody's said: "Genesis and Multicare have suffered a deterioration in operating results and financial condition stemming from the impact of Medicare PPS combined with high leverage. Despite cost cutting efforts, operating margins remain depressed, and planned asset divestitures have not materialized as anticipated. Further, restructuring efforts could be adversely impacted by the currently difficult state of the long-term care sector, with several large providers already filing for bankruptcy in recent months."

Standard & Poor's also lowered its corporate credit, bank loan, subordinated debt, and first mortgage bond ratings on Genesis and its bank loan ratings on Multicare. In addition, S&P announced that it removed all ratings from CreditWatch, where they were initially placed on Nov. 3, 1998, with negative implications.

Genesis, which took on substantial debt when it acquired Multicare, obtained some relief last August. The Cypress Group and Texas Pacific Group, Genesis' partners in a joint venture created to buy Multicare, restructured the joint venture's finances and invested an additional $50 million. That investment, health care analyst Andrew Gitkin of Paine Webber Inc. told Long Term Care, "clears the outlook for the company and gives them another leg to stand on—for a while, at least."

"We believe that the toughest part of the transition to prospective pay is now behind us," said Jamie Singleton, vice-chairman of The Cypress Group, in a press release issued at the time. "By utilizing the strength of the Genesis management team, its regionally concentrated assets and strategic alliances, we believe Genesis will emerge as a long-term leader as the industry grows and consolidates."

But regaining its footing has not proven easy. In its February 3 quarterly earnings report, Genesis reported that its net loss before the cumulative effect of an accounting change was $439.8 million ($10.37 per share) for the quarter ended December 31, 1999, compared to a loss of $277.3 million ($7.67 per share) for the previous quarter.

While acknowledging the "slight decline" in the company's report, Chairman and Chief Executive Officer Michael R. Walker pointed to hopeful signs. "[T]he preliminary figures for January 2000 indicate improvement in both occupancy and census mix," he said. "The operating results of the Company's healthcare service business, which includes NeighborCare Pharmacies and rehabilitation services were consistent with the prior quarter." Walker noted that the company transitioned 24 facilities to the full PPS federal rate effective January 1, which should boost revenues, and that "we continue to make progress on our remaining deleveraging transactions that should provide in excess of $125 million in net proceeds." In addition, he pointed out, cutting back on planned development has reduced capital outlays.

If Genesis and Multicare file for bankruptcy, ElderTrust may follow. As of the end of last year, about 70% of the real estate investment trust's assets were leases and loans secured by properties wholly or partly owned or leased by Genesis. "While we are hopeful that Genesis and Multicare will be able to revise their capital structures in a manner that will improve their financial condition and permit them to continue to meet their obligations to us, we cannot be sure that this will be the result," said ElderTrust President and Chief Executive Officer D. Lee McCreary, Jr., in a company press release. "We are continuing to explore the ramifications that these announcements have on the company."

ElderTrust also reported that it has been in discussions with Genesis and Multicare about a possible restructuring of its transactions with the two. The parties, it said, are continuing these discussions.