Top Junk Loser Undone by Equipment Costs: Distressed Debt

Creditors are losing confidence in 21st Century Oncology Holdings Inc., driving its bonds to the deepest loss among junk-bond issuers in the U.S. this month as the government considers reducing payments to cancer centers.

21st Century’s unsecured bonds due April 2017 have fallen 12 cents to 80 cents on the dollar in July, resulting in a 12.4 percent loss that leads the Bloomberg High Yield Corporate Bond Index. The drop came after the Department of Health and Human Services said July 3 that it proposed trimming the amount of money that Medicare and Medicaid provide to radiation therapy providers for equipment costs, subject to public comments.

The operator of about 376 cancer treatment centers in the U.S. and Latin America is burning through cash after postponing an initial public offering of stock that would have given it about $88 million, which it would have used to pay loans, a May 21 regulatory filing showed. Excluding acquisitions that may boost income, the Fort Myers, Florida-based company has enough cash for four months based on its spending and earnings for the latest year, according to data compiled by Bloomberg.

“They were looking to do an IPO and were excited about telling a growth story,” Adam McLaren, an analyst at Moody’s Investors Service, said in a telephone interview from New York. “It’s harder to grow organically when you’re having top-line revenue pressure.”

Government Cuts

The Centers for Medicare and Medicaid is proposing to cut by 4 percent the almost $1.8 billion it paid for radiation oncology services in 2013, according to the department’s explanation of the rule changes filed in the Federal Register on July 11. The proposed cut is larger than had been expected by Standard & Poor’s, Cheryl Richer, a director at the ratings company, said in a telephone interview from New York.

Sherri Kubesh, a spokeswoman for 21st Century, said she couldn’t provide comment.

21st Century would stand to lose about $13 million in annual sales under a 4 percent cut. It collected 45 percent of its total $716 million in net patient service revenue from Medicare and Medicaid in 2013, according to the May 21 filing.

The company’s $360 million of unsecured 9.875 percent bonds fell as much as 15 cents the week the government disclosed the proposed reimbursement rate changes, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes yielded 19.9 percent as of July 15, or 18.9 percentage points more than similar-maturity Treasuries, above the 10-point level that’s considered distressed.

Bonds Fall

A $350 million issue of 8.875 percent second-lien notes due January 2017 dropped to 96.75 cents on the dollar on July 8 from 103.25 cents in June. Those bonds now trade at 98.25 cents to yield 9.68 percent.

21st Century is graded B3 by Moody’s and an equivalent B-at S&P, which has a “negative” outlook on the rating. The company has $994.5 million of long-term borrowings, Bloomberg data show. Issuers rated less than Baa3 by Moody’s and BBB- at S&P are considered high-yield, high-risk, or junk.

The company, previously known as Radiation Therapy Services Holdings Inc., and competitors such as Manhattan Beach, California-based Vantage Oncology Inc. have been buffetted by a series of reimbursement cuts as the government tries to pare health-care spending, Kyle Smith, a senior vice president at Jefferies Group LLC, said by telephone from New York.

Vantage Notes

Vantage’s 9.5 percent secured notes due June 2017 fell 3.75 cents on the dollar to 96.75 cents after the government announcement, Trace data show. They now yield 10.82 percent.

21st Century hasn’t produced a profit for the six years that it has reported its performance publicly, regulatory filings show. It posted a net loss of $151.5 million in the 12 months ended March 31.

The company reported 12 adjustments to first-quarter earnings before interest, taxes, depreciation and amortization in a May 29 filing in part to “reflect the full period effect of our acquisitions.” It purchased OnCure Holdings Inc. in October and South Florida Radiation Oncology in February, adding to its radiation therapy centers and physician network.

21st Century used similar adjustments to raise its 2013 Ebitda to $123.8 million from $6.41 million, according to the May 21 filing.

The cancer care provider had planned to expand its $100 million revolving loan after its IPO so that it could pursue more acquisitions, its May 21 filing showed. It has since drawn on that revolver to meet debt-service obligations and now has $15.1 million available, the filing shows.

‘Thousand Cuts’

Richer said S&P expects the company will “return to a more favorable cash flow position next year.” Some of the current cash drain is from what 21st Century is spending to integrate its acquired businesses, she said.

Moody’s expects the company to turn cash-flow positive in 2015, according to a July 2 report. The company said 21st Century’s integrated cancer care business model, which includes affiliations with many types of doctors who treat cancer, will result in more patient referrals and a greater number of total treatments.

The company was acquired in February 2008 for $998.5 million by Vestar Capital Partners Inc., a New York-based private-equity firm that also owns proxy adviser Institutional Shareholder Services Inc., grocery supplier American Roland Food Corp. and Sun Products Corp., which makes household cleaning products including Wisk detergents, Bloomberg data show.

“Investors have ridden the industry through many very significant challenges,” said Smith of Jefferies. “And it’s not helpful that the government keeps coming at the industry with death by a thousand cuts.”