Healthscope’s lenders could drive a quick sale as hedge funds face off with landlords

Healthscope’s lender syndicate may want a quick sale to get a tidy return. But its landlords are not so keen on taking a haircut on their rents, and a break-up of the group could leave some hospitals to wither.

The Northern Beaches Hospital is a key property in the Healthscope portfolio . Picture: Max Mason-Hubers

The future of the Healthscope hospital empire will be decided by the offshore hedge funds that drove the appointment of receivers McGrathNicol which took control of the business on Monday.

Two international funds, London’s Polus Capital Management and Los Angeles-based Canyon Partners, control about 23 per cent of Healthscope’s debt and may seek to drive a rapid sale of the best assets, potentially leaving unwanted hospitals in limbo.

They picked up their positions in the heavy trading of Healthscope’s debt ahead of the receivership when about 30 per cent of the group’s $1.4bn debt pile changed hands. Buyers had included David Di Pilla’s HMC Capital, whose funds are landlords to 11 Healthscope hospitals, but HMC sold out and declined to put equity into a mooted deal.

Australian banks controlled just over 10 per cent of the debt before the receivers were called in, but their exposure could rise if a $100m facility from Commonwealth Bank is drawn upon. The remainder of the debt is in the hands of offshore institutions, primarily Asian banks.

Hedge funds have chased the debt on the assumption they will be able to rapidly turn a profit from the sale of the Healthscope business, and a carve up is potentially the fastest route to realise that return.

Northern Beaches Hospital. Picture: Max Mason-Hubers

Their pay-out would also depend on the willingness of landlords to cop a “haircut” on the rents that the hospitals pay, as advocated by Healthscope chief executive Tino La Spina this week.

The syndicate has been dubbed challenging with robust views about the best course forward.

A relatively fast transaction could mean the group is dismantled and the best hospitals are cherry picked by rival operators, and lower quality assets cast aside. Local banks, however, are wary of reputational damage if the country’s second largest hospital operator is seriously disrupted.

A messy split could create new issues for the federal government if the crown jewels of Healthscope’s portfolio are sold off quickly, leaving behind unwanted facilities that analysts say would act as a drag on the price of the entire business if it were sold in one line.

The landlords are also keen to ensure that any “haircut” on the rents that Healthscope is paying would be insubstantial, as this would damage their own portfolios.

Mr Di Pilla’s HMC Capital has exposure to Healthscope hospitals in two funds – the HealthCo Healthcare & Wellness REIT and an unlisted healthcare fund.

HMC noted on Tuesday that entities in the Healthscope group had entered receivership, via McGrathNicol, and others administration, with KordaMentha, but the ones it was contracted with remain operating.

The investment manager said the funds’ existing legal rights “remain in place, including cross default and termination rights”, and its termination rights “are not yet enforceable”.

Canada’s Northwest Healthcare Properties Real Estate Investment Trust, which owns 12 Healthscope hospital sites in a venture with Singapore’s GIC, said it intends to work with McGrathNicol and potential bidders as the sale process continues.

It said rent owing from Healthscope, other than some money covered under deferral arrangements, had been paid and Healthscope was meeting its lease obligations.

NorthWest Healthcare chief executive Craig Mitchell told investors this month that there were ten active bidders in the first round for the Healthscope hospitals. He said that bids had mainly come from Australian operators interested in the whole or part of the portfolio.

Mr Mitchell said the hospitals would stay open and the shift to new owners would take three to four months to play out. When asked about the potential for concessions by landlords, he said it would be a negotiation with a view to preserving its position.

“We have contractual rights and we will ensure that we protect our contractual rights,” he said.

Mr La Spina said on Monday there had been ten bids for all or part of the company and McGrathNicol’s appointment would spur further interest.

Originally published as Healthscope’s lenders could drive a quick sale as hedge funds face off with landlords