Long-Term Debt

3 Months Ended

Mar. 31, 2020

NOTE 6 – LONG-TERM DEBT

The following table provides a summary of the components of long-term debt (in thousands):

	March 31,			December 31,
	2020			2019

Senior Credit Facility:
Revolving Credit Facility, maturing 2021	$	47,000		$	22,000
Term Loan Facility, maturing 2022		738,336			738,336
ABL Credit Facility, maturing 2021		99,000			75,000
Senior Notes, maturing 2023		400,000			400,000
Unamortized debt issuance costs and discounts		(23,327	)		(25,543	)
Finance lease obligations		21,988			22,261
Other debt		316			419
Total debt		1,283,313			1,232,473
Less: Current maturities of long-term debt		(1,262,744	)		(1,211,485	)
Total long-term debt	$	20,569		$	20,988

As discussed below, the Company defaulted on the performance of its covenants under the CS Agreement and the Indenture governing the Company’s Senior Notes. As such, all outstanding debt as of March 31, 2020 and December 31, 2019 related to the Revolving Credit Facility, the Term Loan Facility, the ABL Credit Facility, and the Senior Notes have been classified as current maturities of long-term debt in the accompanying consolidated financial statements.

Debtor-in-Possession Credit Agreement

On April 10, 2020, the Company entered into a Superpriority Secured Debtor-in-Possession Credit Agreement, among the Company, as the borrower, certain subsidiaries of the Company party thereto as guarantors, the lenders party thereto (the “DIP Lenders”), GLAS USA, LLC, as administrative agent for the lenders (the “Administrative Agent”), and GLAS Americas, LLC, as collateral agent for the lenders (the “DIP Credit Agreement”). The Bankruptcy Court entered a final order approving the DIP Credit Agreement on May 6, 2020 (the “Final Order”).

The DIP Credit Agreement allows the Company to borrow term loans (the “DIP Loans”) with an aggregate principal amount of up to $100 million (the “DIP Facility”). The Company may draw up to a maximum principal amount of $60 million under the DIP Facility, and thereafter may draw the remaining portion of the loan commitments not drawn subject to the consent of the required lenders under the DIP Credit Agreement or if needed under the Budget (as defined below).

The DIP Loans bear interest at a rate per annum, at the option of the Company, equal to (i) an adjusted LIBOR (with a floor of 1.00%) plus 10.00% or (ii) an alternate base rate (with a floor of 2.00%) plus 9.00%. The adjusted LIBOR is equal to the rate of interest quoted as the London interbank offering rate for deposits in dollars for a term comparable to the interest period applicable to a DIP Loan, adjusted for certain statutory reserves applicable to the Administrative Agent or any DIP Lender under the regulations promulgated by the Board of Governors of the Federal Reserve System of the United States. The alternate base rate is equal to the greatest of (x) the federal funds rate plus 0.5%, (y) the prime rate established by the Administrative Agent, and (z) the adjusted LIBOR in effect plus 1.00%. Upon the occurrence of an event of default, the Administrative Agent is permitted to charge a default rate of interest equal to 2.00% above the rate otherwise applicable. The Company must make interest payments monthly, in arrears, on the first day of each month, upon any prepayment, and at the final maturity date of the DIP Facility.

The Company will use the proceeds of the DIP Loans to fund its operations and working capital during the Chapter 11 Cases, pay obligations arising from or related to the Carve Out, if applicable (as defined below), pay professional fees in connection with the Chapter 11 Cases, make adequate protection payments, and pay fees and expenses incurred in connection with negotiating and implementing the DIP Credit Agreement.

As security for the DIP Loans, the DIP Lenders are entitled to joint and several superpriority claim status in the Chapter 11 Cases. Further, the Debtors granted in favor of the DIP Lenders (i) a first priority security interest in and lien upon (x) the amounts deposited in a segregated deposit account for advances of DIP Loans under the DIP Credit Agreement, and (y) subject to order by the Bankruptcy Court, avoidance actions and the proceeds thereof, and (ii) a junior security interest in and lien upon all of the assets of the Debtors encumbered by the liens established pursuant to the CS Agreement. The guarantors under the CS Agreement also guaranteed the obligations of the Company under the DIP Credit Agreement. The liens and superpriority claims of the DIP Lenders are subject in each case to a carve out (the “Carve Out”) that accounts for certain administrative, court and legal fees payable in connection with the Chapter 11 Cases.

The DIP Credit Agreement contains customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among others, (i) the obligation to deliver a cash flow forecast, setting forth all line-item cumulative receipts and operating disbursements on a weekly basis for a thirteen-week period (the “Budget”), (ii) the obligation to update the Budget every four weeks, (iii) the obligation to achieve certain milestones established by the DIP Lenders, and (iv) the obligation to deliver weekly and monthly operating reports. The Company must use the proceeds of the DIP Loans and operate its business in a manner consistent with the Budget, subject only to variances of 15% for aggregate collections and 15% for aggregate disbursements, tested on a rolling four-week basis.

Moreover, the DIP Credit Agreement contains customary representations and warranties and events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, cross defaults to certain indebtedness, certain bankruptcy-related events (such as the conversion of the Chapter 11 Cases to proceedings under Chapter 7 of the Bankruptcy Code), certain events under ERISA, the liens on the collateral of the DIP Lenders cease to be valid and perfected, and a change of control of the Company. If an event of default occurs, the Administrative Agent, at the request of the requisite DIP Lenders, will be entitled to take various actions after giving notice to the Company, including the acceleration of all amounts due under the DIP Credit Agreement and the termination of the DIP Lenders commitments to make DIP Loans, subject to the terms of the Final Order approving the DIP Credit Agreement.

The DIP Facility will mature upon the earlier to occur of (i) October 10, 2020, (ii) the acceleration of the DIP Loans and the DIP Lenders’ commitments as described above, and (iii) the effective date of the Plan.

Senior Credit Facility

In connection with the Spin-off, on April 29, 2016, the Company entered into a credit agreement (the “CS Agreement”), among the Company, the lenders party thereto and Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent and collateral agent. On April 11, 2017, the Company executed an agreement with its Senior Credit Facility lenders to amend certain provisions of its Senior Credit Facility (the “CS Amendment”), as described below. On March 14, 2018, the Company executed a second agreement with its Senior Credit Facility lenders to amend certain provisions of its Senior Credit Facility (the “CS Second Amendment”), as described below.

The CS Agreement initially provided for an $880 million senior secured term loan facility (the “Term Loan Facility”) and a $100 million senior secured revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Senior Credit Facility”). The Term Loan Facility was issued at a discount of $17.6 million, or 98% of par value, and has a maturity date of April 29, 2022, subject to customary acceleration events and repayment, extension or refinancing. The Revolving Credit Facility has a maturity date of April 29, 2021, subject to certain customary acceleration events and repayment, extension or refinancing. The CS Amendment reduced the Revolving Credit Facility’s capacity from $100 million to $87.5 million until December 31, 2017, at which time the capacity decreased to $75.0 million. The CS Second Amendment further reduced the Revolving Credit Facility’s capacity to $62.5 million through maturity, effective with the execution of the amendment on March 14, 2018.

The CS Agreement contains customary covenants, including a maximum permitted Secured Net Leverage Ratio, as determined based on 12 month trailing Consolidated EBITDA, as defined in the CS Agreement. On April 11, 2017, the Company executed the CS Amendment with its Senior Credit Facility lenders to amend the calculation of the Secured Net Leverage Ratio beginning July 1, 2017 through maturity, among other provisions. In addition, the CS Amendment raised the minimum Secured Net Leverage Ratio required for the Company to remain in compliance for certain periods, and also changed the calculation of compliance for specified periods. The CS Second Amendment, which was executed on March 14, 2018, amended the Secured Net Leverage Ratio for the period July 1, 2017 through maturity.

After giving effect to the CS Amendment and the CS Second Amendment, the maximum Secured Net Leverage Ratio permitted under the CS Agreement, as determined based on 12 month trailing Consolidated EBITDA measured as of the last day of each fiscal quarter as defined in the CS Agreement follows:

		Maximum
		Secured Net
Period		Leverage Ratio

Period from July 1, 2018 to December 31, 2019		5.00 to 1.00
Period from January 1, 2020 and thereafter		4.50 to 1.00

In addition to amending the calculation of the Secured Net Leverage Ratio and the Maximum Secured Net Leverage Ratio, the CS Amendment and the CS Second Amendment also affected other terms of the CS Agreement as follows:

•

Through April 29, 2022, the Company is required to use asset sales proceeds to make mandatory redemptions under the Term Loan Facility.

•

The Company may request to exercise Incremental Term Loan Commitments for the greater of $100 million or an amount which would produce a Secured Net Leverage Ratio of 3.35 to 1.00.

•

The Company may incur Permitted Additional Debt so long as the Total Leverage Ratio, adjusted for the Permitted Additional Debt, is below 5.50 to 1.00.

Prior to the CS Amendment, interest under the Term Loan Facility accrued, at the option of the Company, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 5.75%, or the alternate base rate plus 4.75%. Following the CS Amendment, interest under the Term Loan Facility accrues, at the option of the Company, at adjusted LIBOR, subject to statutory reserves and a floor of 1% plus 6.75%, or the alternate base rate plus 5.75%. The effective interest rate on the Term Loan Facility was 8.99% as of March 31, 2020. Interest on outstanding borrowings under the Revolving Credit Facility accrues, at the option of the Company, at adjusted LIBOR, subject to statutory reserves and a floor of 0% plus 2.75%, or the alternate base rate plus 1.75%, and remains unchanged under the CS Amendment and the CS Second Amendment. The effective interest rate on the Revolving Credit Facility was 6.53% as of March 31, 2020.

Borrowings from the Revolving Credit Facility are used for working capital and general corporate purposes. As of March 31, 2020, the Company had $47.0 million of borrowings outstanding on the Revolving Credit Facility and had $15.2 million of letters of credit outstanding that were primarily related to the self-insured retention levels of professional and general liability and workers’ compensation liability insurance as security for the payment of claims. As of March 31, 2020, the Company had borrowing capacity under its Revolving Credit Facility of $0.3 million subject to the restraint of the overall borrowing capacity calculated by the Secured Net Leverage Ratio.

The Company has defaulted on the performance of its covenants under the CS Agreement. The Company filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on April 7, 2020, which constituted an event of default (the “Bankruptcy Event of Default”). In addition, the Company’s Secured Net Leverage Ratio exceeded 5.00 to 1.00 as of December 31, 2019, which constituted an event of default under the CS Agreement (the “Ratio Event of Default”). Moreover, based on the Bankruptcy Default and Ratio Event of Default, the Company’s management concluded there is substantial doubt regarding the Company’s ability to continue as a going concern within one year from the issuance of its consolidated financial statements. As a result, the Company received a going concern qualification in connection with the external audit report of these consolidated financial statements, which also constituted a default under the CS Agreement (the “Going Concern Default”). The CS Agreement also requires the Company to deliver to Credit Suisse its consolidated audited financial statements within ninety days of the end of the 2019 fiscal year. The Company failed to satisfy this covenant on March 30, 2020, which constituted a default under the CS Agreement (the “FS Delivery Default”). The FS Delivery Default has been cured. The Going Concern Default will mature into an event of default after notice to the Company from the administrative agent and the lapse of a thirty-day cure period.

The CS Agreement allows the lenders thereunder to accelerate the outstanding indebtedness and foreclose on the collateral subject to liens after the occurrence of an event of default, such as the Bankruptcy Event of Default and Ratio Event of Default. However, the lenders are automatically stayed from enforcing their remedies under the CS Agreement as of the date of the Company’s bankruptcy petition pursuant to the provisions of the Bankruptcy Code.

ABL Credit Facility

In connection with the Spin-off, on April 29, 2016, the Company entered into an ABL Credit Agreement (the “UBS Agreement,” and together with the CS Agreement, collectively, the “Credit Agreements”), among the Company, the lenders party thereto and UBS AG, Stamford Branch (“UBS”), as administrative agent and collateral agent. On April 11, 2017, the Company executed an amendment to the UBS Agreement with its lender party thereto, which aligned the provisions of the UBS Agreement with the CS Amendment. The UBS Agreement provides for a $125 million senior secured asset-based revolving credit facility (the “ABL Credit Facility”). The available borrowings from the ABL Credit Facility, which are based on eligible patient accounts receivable, are used for working capital and general corporate purposes. As of March 31, 2020, the Company had $99.0 million of borrowings outstanding on the ABL Credit Facility and no additional borrowing capacity.

The ABL Credit Facility has a maturity date of April 29, 2021, subject to customary acceleration events and repayment, extension or refinancing. Interest on outstanding borrowings under the ABL Credit Facility accrues, at the option of the Company, at a base rate or LIBOR, subject to statutory reserves and a floor of 0%, except that all swingline borrowings will accrue interest based on the base rate, plus an applicable margin determined by the average excess availability under the ABL Credit Facility for the fiscal quarter immediately preceding the date of determination. The applicable margin ranges from 1.75% to 2.25% for LIBOR advances and from 0.75% to 1.25% for base rate advances. The effective interest rate on the ABL Credit Facility was 3.79% as of March 31, 2020.

The ABL Credit Facility has a “Covenant Trigger Event” definition that requires the Company to maintain excess availability under the ABL Credit Facility equal to or greater than the greater of (i) $12.5 million and (ii) 10% of the aggregate commitments under the ABL Credit Facility. If a Covenant Trigger Event occurs, then the Company is required to maintain a minimum Consolidated Fixed Charge Ratio of 1.10 to 1.00 until such time that a Covenant Trigger Event is no longer continuing. In addition, if excess availability under the ABL Credit Facility were to fall below the greater of (i) 12.5% of the aggregate commitments under the ABL Credit Facility and (ii) $15.0 million, then a “Cash Dominion Event” would be triggered upon which the lenders could assume control of the Company’s cash.

The Company filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code on April 7, 2020. The Company’s filing of the bankruptcy petition constituted an event of default under the UBS Agreement. The UBS Agreement allows the lenders thereunder to accelerate the outstanding indebtedness after the occurrence of an event of default. However, the lenders are automatically stayed from enforcing their remedies under the UBS Agreement as of the date of the Company’s bankruptcy petition pursuant to the provisions of the Bankruptcy Code.

The Company also failed to satisfy its affirmative covenant under the UBS Agreement to deliver to UBS audited consolidated financial statements within 90 days of the end of the 2019 fiscal year. The failure to timely deliver the audited consolidated financial statements of the Company constituted a default under the UBS Agreement, which has since been cured. In addition, the Company’s receipt of a going concern qualification in connection with the external audit report of these consolidated financial statements also constituted a default under the UBS Agreement.

Credit Agreement Covenants

In addition to the specific covenants described above, the Credit Agreements contain customary negative covenants which limit the Company’s ability to, among other things, incur additional indebtedness, create liens, make investments, transfer assets, merge or acquire assets, and make restricted payments, including dividends, distributions and specified payments on other indebtedness. They include customary events of default, including payment defaults, material breaches of representations and warranties, covenant defaults, default on other material indebtedness, customary Employee Retirement Income Security Act (“ERISA”) events of default, bankruptcy and insolvency, material judgments, invalidity of liens on collateral, change of control or cessation of business. The Credit Agreements also requires the Company to deliver audited annual financial statements accompanied by an opinion of the Company’s accountants (which opinion is required to be without a “going concern” qualification). The Credit Agreements also contain customary affirmative covenants and representations and warranties.

Senior Notes

On April 22, 2016, QHC issued $400 million aggregate principal amount of 11.625% Senior Notes due 2023, pursuant to the Indenture. The Senior Notes were issued at a discount of $6.9 million, or 1.734%, in a private placement and are senior unsecured obligations of the Company guaranteed on a senior basis by certain of the Company’s subsidiaries (the “Guarantors”). The Senior Notes mature on April 15, 2023 and bear interest at a rate of 11.625% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2016. Interest on the Senior Notes accrues from the date of original issuance and is calculated on the basis of a 360-day year comprised of twelve 30-day months. The effective interest rate on the Senior Notes was 12.49% as of March 31, 2020.

The Indenture contains covenants that, among other things, limit the ability of the Company and certain of its subsidiaries to incur or guarantee additional indebtedness, pay dividends or make other restricted payments, make certain investments, create or incur certain liens, sell assets and subsidiary stock, transfer all or substantially all of its assets or enter into merger or consolidation transactions. The Company defaulted on its obligations under the Indenture when it filed a voluntary petition for bankruptcy relief under Chapter 11 of the Bankruptcy Code on April 7, 2020. The Company’s default allows the trustee to accelerate payment of the Senior Notes; however, the Bankruptcy Code imposes an automatic stay which prevents the lender’s enforcement of this remedy while the Chapter 11 Cases are pending.

On May 17, 2017, the Company exchanged the 11.625% Senior Notes due 2023 (the “Initial Notes”) in the aggregate principal amount of $400 million, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of 11.625% Senior Notes due 2023 (the “Exchange Notes”), which have been registered under the Securities Act. The Initial Notes were substantially identical to the Exchange Notes, except that the Exchange Notes are registered under the Securities Act and are not subject to the transfer restrictions and certain registration rights agreement provisions applicable to the Initial Notes.

On and after April 15, 2019, the Company is entitled, at its option, to redeem all or a portion of the Senior Notes upon not less than 30 nor more than 60 days’ notice, at the following redemption prices specified in the table below, plus accrued and unpaid interest, if any, to the redemption date. The redemption prices are expressed as a percentage of the principal amount on the redemption date. Holders of record on the relevant record date have the right to receive interest due on the relevant interest payment date. In addition, prior to April 15, 2019, the Company could have redeemed some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make whole” premium, as set forth in the Indenture. The Company was entitled to redeem up to 35% of the aggregate principal amount of the Senior Notes until April 15, 2019 with the net proceeds from certain equity offerings at the redemption price set forth in the Indenture.

The following table provides a summary of the redemption periods and prices related to the Senior Notes:

	Redemption
Period	Prices

Period from April 15, 2019 to April 14, 2020		108.719	%
Period from April 15, 2020 to April 14, 2021		105.813	%
Period from April 15, 2021 to April 14, 2022		102.906	%
Period from April 15, 2022 to April 14, 2023		100.000	%

Debt Issuance Costs and Discounts

The following table provides a summary of unamortized debt issuance costs and discounts (in thousands):

	March 31,			December 31,
	2020			2019

Debt issuance costs	$	34,533		$	34,533
Debt discounts		24,536			24,536
Total debt issuance costs and discounts at origination		59,069			59,069
Less: Amortization of debt issuance costs and discounts		(35,742	)		(33,526	)
Total unamortized debt issuance costs and discounts	$	23,327		$	25,543

Finance Lease Obligations and Other Debt

The Company’s debt arising from finance lease obligations primarily relates to its corporate office in Brentwood, Tennessee. As of March 31, 2020 and December 31, 2019, this finance lease obligation was $16.0 million and $16.3 million, respectively. The remainder of the Company’s finance lease obligations relate to property and equipment at its hospitals and corporate office. Other debt consists of physician loans and miscellaneous notes payable to banks.

Debt Maturities

The following table provides a summary of debt maturities for each of the next five years and thereafter (in thousands):

	March 31, 2020

Remainder of 2020	$	1,285,656
2021		1,629
2022		1,450
2023		1,350
2024		1,455
Thereafter		15,100
Total debt, excluding unamortized debt issuance costs and discounts	$	1,306,640

Interest Expense, Net

The following table provides a summary of the components of interest expense, net (in thousands):

	Three Months Ended March 31,
	2020		2019

Senior Credit Facility:
Revolving Credit Facility	$	566	$	60
Term Loan Facility		16,045		18,332
ABL Credit Facility		820		386
Senior Notes		11,625		11,626
Amortization of debt issuance costs and discounts		2,216		2,161
All other interest expense (income), net		762		(299	)
Total interest expense, net	$	32,034	$	32,266

Quorum Health Corp 10-Q