Rotech, second-lien noteholders ink pre-packaged restructuring deal

By Caroline Salls

Pittsburgh, March 15 - Rotech Healthcare Inc. has reached an agreement in principle with some holders of its 10½% senior second-lien notes on a potential restructuring and recapitalization of the company's current capital structure, including its second-lien note obligations, according to an 8-K filed Friday with the Securities and Exchange Commission.

As a result of the agreement in principle, Rotech said it would not make the March 15 interest payment on the second-lien notes.

In addition, the company and consenting noteholders have entered into an agreement under which the noteholders will support the restructuring of Rotech's outstanding secured debt through a pre-arranged Chapter 11 plan of reorganization.

According to a company news release, Rotech expects to file its consensual plan and bankruptcy petitions in the coming weeks. Because of the agreement in principle, the entire process is expected to be completed within 90 to 120 days.

"The company has struggled for years under the debt burden placed on it when it was spun off from its former parent in 2002," president and chief executive officer Steven P. Alsene said in the release.

"Since that time, dramatic reimbursement reductions have made it essential that we reduce our debt to a manageable level.

"With this debt reduction, we believe we will be able to further take advantage of our inherent strengths to grow the company, both organically and through carefully selected acquisitions."

Restructuring terms

The terms of the proposed restructuring include the following:

• Payment in full of all term loan debt;

• The proposed amendment and potential extension of $230 million of 10¾% first-lien notes;

• The exchange or conversion of all $290 million outstanding under the second-lien indenture into 100% of the common equity in the company;

• Payment in full of general unsecured claims, with all pre-bankruptcy claims owed to general unsecured creditors to be paid in the ordinary course; and

• The distribution to existing common stockholders of $0.10 per share of common stock, with the total amount distributed not to exceed $2.62 million.

Common stockholders would not have any continuing equity interest in Rotech.

In conjunction with the restructuring, Rotech said it is in negotiations with some of its secured creditors to obtain debtor-in-possession financing to ensure sufficient liquidity throughout what is expected to be a relatively short Chapter 11 process.

The company said it was also recently awarded a new five-year $68.3 million contract from the Department of Veteran Affairs to provide home oxygen and respiratory services to medical centers in eight cities.

Negotiations with consenting noteholders to implement the transactions are ongoing, the 8-K said.

The consenting noteholders also hold a majority in outstanding principal amount of the company's 10¾% senior secured notes and constitute a majority of the lenders under Rotech's term loan.

Forbearance agreement

On Friday, the company entered into a forbearance agreement with term loan lender SPCP Group, LLC and administrative agent Silver Point Finance, LLC.

The forbearance period runs until April 15.

As of March 15, Rotech said it was in default on the term loan agreement as a result of its failure to pay interest due on the second-lien notes. The lenders have agreed not to accelerate the loan during the forbearance period to give the company time to complete the plan support agreement transactions.

Warrants issued

According to the 8-K, a federal court in Orlando, Fla., has issued warrants authorizing the collection of various categories of billing records from Rotech. Subpoenas for particular relevant records were also served on specified company locations.

The company said the investigation appears to be focused on the same subject matter as the inaccurate reimbursement for the provision of oxygen contents that it identified, reported and repaid in 2012 to the Centers for Medicare & Medicaid Services.

Rotech said national law firm of Foley & Lardner LLP conducted an extensive review of this matter at its request last year, and the company identified an error made in programming logic within its billing system.

As a result of this error, Rotech said it determined that it had been overpaid by $6.2 million on some specific Medicare claim types since Jan. 1, 2009.

The company said the programming logic that caused this error has been corrected in its billing system. Rotech said it is not aware of any other Medicare overpayment issues and believes that it has already refunded the appropriate amount for this error.

Rotech is an Orlando, Fla.-based provider of home medical equipment and related products and services.

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