HPE Miami 2023 | Distressed Investing: Where Are the Opportunities? - McDermott Will & Emery

HPE Miami 2023 | Distressed Investing: Where Are the Opportunities?


The final panel of HPE Miami 2023 focused on distressed investing in healthcare companies and the best ways to take advantage of opportunities (and avoid pitfalls) with such investments. Felicia Gerber Perlman, McDermott partner and global head of the Business Restructuring Practice Group, moderated the panel, which featured insights from:

  • Morris Alhale, Director, AlixPartners
  • Ari Lefkovits, Managing Director, Lazard
  • Frederic Levenson, Partner and Co-Head of Private Equity, McDermott Will & Emery
  • Zhe Zhao, Vice President, Oaktree Capital Management

In Depth

Key takeaways included:

  1. The healthcare industry is currently experiencing various challenges and significant headwinds, including increased leverage, margin pressures and more than $20 billion of debt that will be due in the next three years. Due to these severe liquidity constraints, healthcare companies are looking for innovative ways to obtain additional capital, either from their existing lenders or from new financing sources in the market.
  2. Lenders have recently exhibited a renewed interest in providing additional capital to distressed healthcare companies, as long as there is a sufficient business justification for this “band-aid liquidity.” In other words, whether they are already involved with the distressed company or looking for a new potential investment opportunity, lenders want to understand how the additional capital will be used by the company. As such, transparency with any existing or potential lender about the intended uses for the requested funds is extremely important in order to maintain credibility and avoid issues obtaining financing in the future.
  3. There are different ways to take advantage of distressed opportunities in the healthcare industry, including by (1) implementing the transaction in court through a 363 sale or plan sponsor acquisition in Chapter 11 or (2) proceeding with the transaction out of court. The bankruptcy process provides certain benefits to a prospective buyer, including the ability to cherry-pick its desired assets, leave behind certain liabilities and select which contracts to assume or reject. However, investors are very aware that bankruptcy can be expensive and time-consuming. Developing a consensual deal structure with key constituents in advance of a Chapter 11 process can help minimize cost and time spent in bankruptcy, providing incentives for parties to “row in the same direction” and reach a consensus at the outset.
  4. In determining whether to invest in a distressed healthcare company, it is important to conduct sufficient diligence and analyze (1) existing and go-forward liquidity issues, as well as additional capital needs, (2) current liabilities and whether they can be disposed of, and (3) the company’s existing capital structure. Investors will want the restructured company to be successful on its own following the proposed transaction and “every dollar counts,” so understanding the company’s cash flow, liabilities and capital structure at the outset is essential. Additionally, healthcare is “a people business” at its core, and there is a certain standard of care that must be maintained regardless of how the transaction is implemented. As such, distressed investors must determine whether the company is able to maintain continuity of care for its patients both while the transaction is implemented and following consummation.
  5. It is critical for any potential investor to evaluate the distressed company’s existing management in order to determine whether to maintain the same team or bring in new management to fix existing issues. Analyzing how the company became distressed in the first place can facilitate this evaluation, including determining (1) whether there were missteps taken by current management, (2) whether current management can be trusted or properly incentivized to implement the proposed process successfully in good faith or (3) whether a new management team is necessary to facilitate the restructuring process.