Healthscope enters receivership as McGrath Nicol takes charge of major hospital operator

Healthscope is the country’s second largest private hospital operator. Picture: iStock.

Global hedge funds that bought cheap debt in Healthscope are believed to have been influential in the outcome of the country’s second largest private hospital operator entering receivership.

Receiver McGrath Nicol was appointed after the majority of its lenders, owed about $1.4bn, voted for the move late last week.

DataRoom foreshadowed the development at the weekend, and this column understands that British hedge fund Polus and US-based Canyon Partners, which hold a sizeable portion of the debt after buying loans at about 40c in dollar, were in favour of calling in receivers.

The top four Australian banks wanted to avoid an official insolvency event, say sources.

Behind the stance of top four banks was the reputational damage that might be caused, and CBA is understood to have offered an additional $100m loan to Healthscope for it to remain in operation.

Sources say all the major banks would offer additional funding to ensure the business keeps opeating, and it would be classified as super senior debt.

Polus, for which Healthscope is its first major Australian investment in distressed debt, has high hopes that it can secure a greater return with the assets handed over to a receiver or administrator and with the business broken up and sold, according to well informed sources.

But many market experts had cautioned against the move, arguing that it would create far more complexity around addressing Heathscope’s challenges from a contract perspective.

While the parent entity has entered receivership, the operational business, which runs the hospitals, has not, said Healthscope in a statement.

Korda Mentha has been appointed as administrator.

The situation was brought to a head on Monday after years of financial challenges for Healthscope and creates uncertainty not just for patients, but its 18,000-strong workforce, despite the business remaining in operation under the new arrangements.

Brookfield entered a bidding war for the business in 2019, trumping an earlier offer for BGH Capital by promising to write out a $4.4bn equity cheque.

Selling its properties for about $2bn and assets in New Zealand for more than $500m helped pay for the investment.

Since that time, hurting the company has been the global pandemic, higher staff costs that are expected to increase further with nurses demanding more pay and what Brookfield has claimed as payments from health insurers that were not enough to cover the costs of procedures carried out for their customers.

The situation leaves a black cloud hanging over the reputation of buyout fund Brookfield, which walked away from the business earlier this month after injecting in additional equity of over $200m in recent years to help stem losses.

Its behaviour irked lenders after it threatened aggressive tactics in the past 18 months that involved trying to spin off some assets out of the company structure.

It meant the loans would be against less assets, leaving the lenders with less security.

But Brookfield later backed away from that move.

Expectations are that a number of Healthscope’s facilities will now close, as consortiums of not-for-profit healthcare operators line up to take control of the business with McGrathNicol’s Keith Crawford to re-engage with suitors.

The prospective buyers will likely demand rent cuts and will not have the scope to own all the assets.

Among its 37 facilities, only six are profitable, say sources.

Already, Healthscope is poised to hand the keys back to the NSW government for the Northern Beaches hospital that it operated as part of a public private partnership.

Healthscope’s two major landlords are HMC Capital’s listed HealthCo Healthcare and Wellness REIT and Northwest Healthcare Properties REIT.

Healthscope has $110m of cash on its balance sheet and said supplier relationships would remain unaffected, with payment terms maintained.