| Obligor profile | |
| Restructuring date | January 2025 |
| Post-exchange rating/outlook | CCC+/Negative/-- |
| Location/Primary industry/GICS | U.S./Healthcare services |
| Post-exchange total reported debt (change) | $813 million (+$82 million) |
| Sponsor/owner | Kinderhook Industries LLC |
| Forecasts (12/31/2025) | |
| Liquidity ratio (x)/Assessment: | 3.5x/Adequate |
| Debt to EBITDA* (x) | Double digits |
| EBITDA to total interest* (x) | <1x |
| EBITDA to cash interest* (x) | <1x |
| *Adjusted by S&P Global Ratings. Footnote. GICS--Global Industry Classification Standard. Source: S&P Global Ratings. |
Transaction Summary
Priming Loan Exchange
Physician Partners LLC (dba Better Health) executed a restructuring consisting of the incurrence of $112.5 million of new money first-out superpriority term loans, the replacement of its existing revolving credit facility with a new first-out superpriority revolving credit facility, and exchanges of existing term loans for first-out, second-out, and third-out superpriority term loans. All the new credit facilities are documented under a new credit agreement. The company used proceeds from the new money term loans to pay accrued interest and transaction fees and add cash to the balance sheet.
In the restructuring, an ad hoc group of term loan lenders (which held roughly 86% of the term loans) provided the new money term loans and extended the maturity of their existing term loans. The ad hoc lenders and the revolving lenders under the existing Better Health credit agreement amended it to facilitate the extensions, permit the exchanges of existing term loans for the new superpriority term loans, and otherwise permit the restructuring. This extend-and-exchange tactic has been reported to have originated as a result of the recent Fifth Circuit Court of Appeals ruling in the Serta case rejecting an interpretation of the open market purchase provision of many credit agreements often relied upon to support previous priming loan exchanges. The new money financing was backstopped by certain ad hoc lenders.
In the initial term loan exchange, the extended term loans were exchanged for a mix of superpriority term loans comprising approximately 27% first-out superpriority term loans, 65% second-out superpriority term loans, and 8% third-out superpriority term loans. A portion of the original loan exchanges were made at a moderate discount to par.
Following the initial exchange, the term loan lenders that were not part of the ad hoc group were offered the opportunity to participate pro rata in the new money term loans and, irrespective of such participation, to exchange their existing term loans at a larger par discount for a mix of 50% second-out superpriority term loans and 50% third-out superpriority term loans. Close to 80% of the non-ad-hoc lenders took part in the subsequent exchange. Altogether, holders of 97% of the existing term loans participated in the initial and subsequent exchanges.
| Physician Partners LLC --Original debt structure | |||||||
|---|---|---|---|---|---|---|---|
| Original debt structure: | Effective ranking in waterfall | Maturity (year) | Rate (%) | Principal (mil. $) | Pre-exchange prices* | Recovery estimates (%) | |
| $105 million RCF | 1 | 2026 | S+CSA+4.00% (subject to pricing grid) | Undrawn | N.A. | 50% | |
| Initial term loans | 1 | 2028 | S+CSA+4.00% | 583 | 41.7 | 50% | |
| Incremental term loans | 1 | 2028 | S+5.50% | 148 | 41.5 | 50% | |
*Prices are based on indicative mid-price. S--SOFR Secured overnight financing rate. CSA--Credit Spread Adjustment. RCF—Rolling credit facility. N/A—Not available. Source: S&P Global Ratings.
| Physician Partners LLC--Post-exchange debt structure | |||||||
|---|---|---|---|---|---|---|---|
| Post-exchange debt structure: | Exchanged from* | Effective ranking in waterfall | Maturity (year) | Rate (%) | Principal (mil. $) | Prices (on Jan. 31, 2025)* | Recovery estimates (%) |
| $105 million first-out superpriority RCF | Original RCF | 1 | 2029 | S+CSA+5.0% | Undrawn | N.A. | 95% |
| First-out superpriority term loans | New $ | 1 | 2029 | S+6.00% | 112.5 | 92.5 | 95% |
| First-out superpriority term loans | Existing 1L TLs, some discounts | 1 | 2029 | S+6.00% | 169 | 92.5 | 95% |
| Second-out superpriority term loans (Tranche B-1) | Initial 1L TLs, varied discounts | 2 | 2029 | S+CSA+4.0% (PIK option) | 338 | 61.5 | 0% |
| Second-out superpriority term loans (Tranche B-2) | Incremental 1L TLs varied discounts | 2 | 2029 | S+CSA+5.5% (PIK option) | 96 | 61.5 | 0% |
| Third-out superpriority term loans | Existing 1L TLs, varied discounts | 3 | 2030 | S+CSA+5.5% (PIK component) | 75 | 21.8 | 0% |
| Stub existing initial term loans | N.A. | 4 | 2028 | S+CSA+4.0% | 22 | 41.9 | 0% |
*Prices are based on indicative mid-price. S--SOFR--Secured overnight financing rate. RCF—Revolving credit facility. N.A.--Not available. Source: S&P Global Ratings. CSA=Credit Spread Adjustment. PIK = Payment-in-kind.
Transaction Mechanics
Existing term loans exchanged into second-out superpriority term loans were allocated between two tranches of such second-out superpriority loans (B-1and B-2) based on whether the existing term loans exchanged were initial or incremental term loans under the existing credit agreement; the loans under the two exchange tranches have the same maturity but bear interest at different rates (consistent with the pre-exchange loans).
The new superpriority credit facilities benefit from pledges of certain previously unencumbered assets, including 100% of the equity of first-tier foreign subsidiaries, and from deposit account control agreements, as well as tightened covenants, additional reporting, and liability management protections.
The term loans of nonparticipating lenders under the existing credit agreement are subordinated to the new superpriority credit facilities. Covenants and other protections were removed from the existing credit agreement, and an option allowing Better Health to extend the grace period for payment of interest until maturity was added.
Impact On Recovery
In general, first-lien recovery prospects for the term lenders are worse after the restructuring due to the elevation of the revolving credit facility (RCF) to a superpriority first-out status and addition of $113 million in new money superpriority first-out term loans.
In our updated recovery analysis, we only anticipate a recovery for the new superpriority first-out loans (consisting of a $105 million RCF, $112.5 million in superpriority new money first-out term loans, and $169.5 million in superpriority exchanged first-out term loans) for which we expect a nearly full recovery with a 95% rounded recovery estimate.
We expect that all of the other debt (second-out, third-out, and unexchanged initial term loans, which effectively have fourth-out position) will realize a negligible recovery, although, of course, the higher priority tranches would be first in line if there is more enterprise value to distribute than we assume (gross enterprise value of $400 million).
That said, the ad hoc lenders that participated in the initial exchanges fared far better than other lenders because:
- The initial term loan exchanges had better allocations of new loans (27% first-out, 65% second-out, and 8% third-out) versus lenders involved with the subsequent exchange (50% second-out and 50% third-out).
- Only a portion of the initial exchanges were at a moderate par discount whereas the subsequent exchanges were all made at a larger par discount%.
The small portion of the original term loan lenders (3% by principal) who did not exchange their loans would be last in line to realize a recovery if there is a subsequent default scenario.
Impact On Liquidity
The restructuring increased cash balances by about $82 million (to about $200 million) as a result of the net proceeds from the new money term loan. In addition, the new debt structure includes various pay-in-kind features and limited amortization that will reduce required annual cash interest payments by $8 million-$10 million. Also, the $105 million revolving credit facility remains undrawn (with letter of credit usage static at $17 million), although availability may be restricted by financial maintenance covenants. The increased liquidity and deferred debt maturities are important because we expect the company to continue to generate negative discretionary cash flow through 2027.
This report does not constitute a rating action.
| Primary Contact: | Steve H Wilkinson, CFA, New York 1-212-438-5093; steve.wilkinson@spglobal.com |
| Additional Contacts: | Tejaswini Tungare, Toronto 1-4165072510; tejaswini.tungare@spglobal.com |
| George Yannopoulos, Toronto 4165072533; george.yannopoulos@spglobal.com |
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