Vencor Reorg Plan Gives Bondholders 29%

Vencor Inc. filed for bankruptcy last week, and some market observers said they expect more carnage in the long-term care sector. The bonds of the company's billion-dollar issue were getting quotes last week in the 20s, a sharp decline from the comparatively lofty heights in the 70s, where they perched as recently as July.

It was surprising that the nursing home chain filed for bankruptcy petition without a formal reorganization plan, said healthcare analyst Premila Peters at KDP Investment Advisors.

However, market observers said that the issuer has an unofficial plan whereby its bankers will end up with a majority share of the company, approximately 56%. Company officials did not return phone calls seeking comment.

Analysts who are familiar with the firm said further that bondholders would get a 29% share of the new company. And the remainder will be owned by Ventas Inc., a real estate firm that is landlord and a major creditor of Vencor. Ventas gets almost all of its revenue from Vencor, sources said.

The company is reportedly working on formulating an official plan, but it has said in statements that it plans to keep the nursing homes and hospitals in operation while in bankruptcy.

The one big variable in the whole situation is the amount the firm will owe in future government liability payments, which will affect the equity left in the company.

The Louisville, Ky.-based company also has arranged for a $100 million bank financing package with Morgan Guaranty Trust Co., a unit of J.P. Morgan & Co.

Nursing homes were hit hard beginning in 1997 when the U.S. government outlined a new Medicare payment plan whereby the agency reimbursed hospitals on a flat-fee basis instead of a cost-basis. With costs spiraling upward, nursing homes and hospitals maintained that they could not turn a profit.

The situation only worsened this year when Medicare imposed a new restrictive payment process known as the prospective payment system. And companies like Vencor, which relied especially heavily on Medicare, were hammered in the capital markets.

Several analysts last week echoed the same dark sentiment: that this is most likely just the first step in a string of long-term care companies to deal with their own mortality. One high yield portfolio manager was even grimmer: He simply laughed and said, "I'm glad I don't own it."

Vencor was one of the first high yield issuers this year to face problems, and it's also the first major bankruptcy, Peters said.

Vencor was once a favorite in the stock market, posting operating profits of nearly 25% at a time that many other hospital chains were hovering around 5%. Then the company's problems began to compound when it was sued by insurance companies, which claimed that it was billing them more than it billed Medicare. And it faced a public relations snafu when it started evicting Medicaid patients to make room for more profitable patients. The company also faced a federal investigation by the U.S. Department Justice for its Medicare billing procedures.