ModivCare Avoids Default With Last-Minute Deal Lenders Urged

(Bloomberg) — Medical transportation firm ModivCare Inc. scored a reprieve from its banks to avert a technical debt default after slow payments left it short on cash. It came just in time. 
A group of creditors had asked the company to secure such concessions by the end of September, according to people familiar with the discussions, and their own negotiations to gain protections on debt they provided in June put them in a position to make demands.
Still, no one wanted to worsen the crisis at ModivCare. Investors had already fled based on default risks and management’s hurried response to the liquidity gap, which involved opening the door to a potential new capital raise. Now, largely thanks to an agreement with banks amending its $325 million revolver on Tuesday, the company has a chance to recover from a month that saw its fortunes turn sharply.
Details from the negotiations surrounding ModivCare’s amendment may offer a more enduring lesson, demonstrating how lenders have the power to forestall the kind of corporate shenanigans that have seen peers lose billions to complex maneuvers that move assets out of their reach. 
A representative for ModivCare declined to comment on the recent developments. 
Investors in ModivCare’s $525 million first-lien term loan held out in June for the inclusion of certain key protections on their loan, which ModivCare ultimately granted. Those included provisions blocking so-called double-dips and other such maneuvers to raise new financing at the expense of existing creditors. 
The negotiating leverage they gained from limiting such risks, which loom large in a market beset with surprise asset moves, later gave the lenders power to demand that ModivCare secure a revolver amendment, and fast, before it pursue other liquidity options that could hurt stakeholders, said the people familiar with the matter, who asked not to be named recounting confidential talks. 
The company had signaled possible plans to issue new debt or equity to bridge its financing gap, filing a shelf registration Sept. 12 that previewed the potential future issuance of up to $200 million in equity, debt or both. Stock and bond prices plunged after the filing, and sent investors clamoring to voice concerns in meetings with management. 
“That was shock to the system,” said Brian Tanquilut, a health care services analyst at Jefferies Financial Group Inc. “No one had anticipated that they would have had to do a raise.”
Lenders sought to clarify the company’s struggles to secure payments and emphasized it didn’t have much more capacity for debt, according to one of the people familiar with the talks.
Under the new amendment, the banks increased the company’s total net leverage ratio and reduced its interest coverage. The company also agreed to pay a quarter of a percentage point more on the interest rate margin for its facility. ModivCare also announced it successfully collected all of the roughly $60 million in contract receivables that it said were delayed last month. 
Lenders are now encouraging the company to sell assets to help repay some of its debt, the people said.
Shares, Bonds Recover
ModivCare’s 5% unsecured notes due 2029, which were trading at deeply distressed levels, rallied as much 8.25 cents on the dollar to 71 cents before paring gains Wednesday morning, according to pricing source Trace. ModivCare shares rose as much as 32% to $19.13 on Wednesday before reeling back some of the advances.
Both securities had taken a dive when the company’s stress become obvious, after a Sept. 12 filing cited “substantial doubt” it could meet its obligations over the next year as a result of payment delays and lowered its earnings guidance. Those announcements came just weeks after management projected optimism about the firm’s financials on an earnings call. 
On that news, its unsecured notes declined by as much as 15 cents on the dollar to 60 cents, according to Trace, and ModivCare shares fell as much as 65% to $11, the lowest since 2008, according to data compiled by Bloomberg. That collapse represented more than a quarter billion of value erased from the company’s market capitalization.
Comparatively unscathed in the carnage of the last few weeks were the holders of ModivCare’s first-lien term loan, which had the benefit of collateral and seniority as well as the heightened protections. 
The loan declined by about 3 cents on the dollar last month and was quoted Wednesday between 95.75 and 96.75 cents on the dollar, according to a person familiar with the matter.
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