Healthscope’s future could hinge on Brookfield holding its nerve

Hospitals operated by Healthscope care for 650,000 patients annually.

Brookfield may not be about to act rashly on Healthscope, say sources close to the healthcare provider, but the understanding is that its decision makers based at its Toronto head office are increasingly of the view it’s no longer fit for investment.

Amid growing chatter about the embattled private hospital operator’s future, the view in the market is that the matter is likely to come to a head around March, when Healthscope is likely to fall foul of a debt covenant agreement.

One source said that the private equity firm has already talked about tipping in about $50m of late to save the ailing Healthscope, but that’s where it is apparently drawing the line.

If Healthscope breaches its debt covenant in March as anticipated, this frees its syndicate of 25 lenders to offload loans – should they wish – at a discounted price.

And this could be the trigger for change.

We saw this happen last year with the country’s largest cancer care provider, GenesisCare.

While that situation was slightly different, in that it entered Chapter 11 bankruptcy in the United States because it was carrying too much debt and its Australian unit was profitable, Healthscope could play out in a similar way.

Alternative investor Oaktree Capital Management and its backers bought up the loans at a discounted rate, and then became the new owners, taking over from its Chinese owner and Kohlberg Kravis Roberts.

Oaktree and its supporters are expected to put GenesisCare back on the market next year.

Perhaps the view of Brookfield is it’s all too hard, and time to move on from the country’s second largest private hospital operator it purchased for $4.4bn in 2019, fending off competition for the listed business from BGH Capital.

Its debt pile was last reported at $1.6bn.

Market sources believe that Healthscope’s debt level and rental contracts are unsustainable, given where its profitability lies, and costs are only getting higher.

Market experts believe that Healthscope’s management could stand on their own to run the hospital operator that cares for 650,000 patients annually, under new ownership.

But there could be a not-for-profit operator or a group like Healthe Care, owned by Pacific Equity Partners, which is part of the solution.

Private equity owner Brookfield has been trying to convince health insurance providers to offer more funding and urged landlords to lower rents.

Brookfield reached a refinancing deal with its lenders on its $1.6bn of debt earlier in the year, and as a result of that agreement the lenders continued to retain security over all the hospitals in the portfolio.

About 40 per cent of Healthscope’s earnings are generated from about four or five hospitals.

Last year, DataRoom reported that Brookfield bought back about $250m debt in Healthscope, which had then undergone a $1.6bn refinancing.