Bankruptcy of national century casts wide net - Industry Scan: In the News - National Century Financial Enterprises Inc.'s bankruptcy filing affects healthcare companies

Healthcare Financial Management, Jan, 2003

The November 18 Chapter 11 bankruptcy filing by National Century Financial Enterprises (NCFE) may have far-reaching effects on the for-profit healthcare industry. The November 26, 2002, Wall Street Journal estimates that critical cash flow of more than 100 healthcare organizations depended on NCFE. According to an article in the November 19 Washington Post, the filing with the bankruptcy court for the Southern District of Ohio showed $3.8 billion owed to bondholders, but the actual amount was thought to be slightly less. Company memos indicate the financial troubles surfaced internally three years ago, according to the Wall Street Journal.

At least five NCFE clients have filed for bankruptcy because of the company's collapse: Doctors Community Healthcare Corp., PhyAmerican Physician Group, Tender Loving Care (a Med Diversified unit), LifeCare Solutions, and Lincoln Hospital Medical Center.

NCFE may have strayed from the securitization paradigm, according to Mark Spradling, chair of the structured finance practice group at Vinson & Elkins LLP in Houston, Texas. "NCFE appears to have overestimated the expected collections on some of its securitization vehicles' receivables pools, thus causing a severe shortfall in the cash flow of the vehicles," said Spradling. "In addition, the 'evergreen' receivables sales agreements that NCFE and its clients executed appear to have lacked adequate provisions for the clients to terminate the arrangements. The clients' financial viability has been adversely affected because collections on the receivables have continued to be paid to NCFE."

Spradling commented that NCFE appears to have set up receivables programs with healthcare provider clients under which the clients committed to sell NCFE future receivables that NCFE then would service. "Even after NCFE stopped making new purchases from its clients, collections from receivables that had not been sold were nevertheless directed into accounts controlled by NCFE for the benefit of its special-purpose securitization vehicles rather than the providers," Spradling said.

Theoretically, according to Spradling, if the providers had received payment in advance for all receivables sold to NCFE, had retained control, and had continued to service all receivables not purchased by NCFE, then the providers' rights to collect on unsold receivables should have been clearer. Instead, it appears that some of NCFE's healthcare provider clients, in effect, became lenders to NCFE.