JPMorgan Unit’s MModal Files Bankruptcy After Buyout

MModal Inc., acquired less than two years ago by JPMorgan Chase & Co.’s investment arm, sought bankruptcy protection to cut debt taken on in the leveraged buyout as hospitals and doctors shift away from its medical-transcription services.

The company, based in Franklin, Tennessee, listed about $876.3 million in debt and $626.8 million in assets as of Feb. 28 in Chapter 11 documents filed today in U.S. Bankruptcy Court in Manhattan. Thirteen affiliates also entered bankruptcy.

One Equity Partners, which manages about $14 billion of private investments for JPMorgan, acquired MModal in August 2012 in a deal valued at $1.1 billion. One Equity contributed about $447 million of equity, according to court papers, leaving MModal saddled with about $770 million in debt.

The debt must be restructured “to better align with changing market dynamics,” Duncan James, MModal’s chief executive officer, said in a statement today. One Equity’s purchase “was financed with a capital structure aligned with a specific set of assumptions that are no longer relevant.”

MModal has struggled to make payments on the debt as software and other products supplant its transcription business, which converts health-care providers’ dictation to text and generates more than 80 percent of revenue. The company’s sales fell more than 9 percent last year to $411 million as earnings dropped almost 12 percent.

‘Highly Erosive’

“The adoption of direct data entry” into electronic health records has “proven to be highly erosive” to MModal’s transcription business, Chief Financial Officer David Woodworth said in a court filing.

MModal missed a Feb. 18 interest payment on $250 million in 10.75 percent bonds due in August 2020, as it negotiated with creditors to cut the debt left over from the buyout.

Those bonds fell half a cent or about 2 percent to 25 cents on the dollar today, according to data compiled by Bloomberg. The bonds traded for about 83 cents on the dollar as of Oct. 29.

The company continues to negotiate with lenders and noteholders in an effort to achieve a “consensual financial restructuring plan,” according to the statement.

MModal said it will finance its reorganization with cash on hand and funds generated from operations, which won’t be affected by the bankruptcy. It had about $34.3 million in cash and cash equivalents as of Feb. 28.

9,900 Employees

MModal, the largest U.S. clinical transcription provider, operates in six countries and has more than 9,900 employees, according to court documents. Its customers include more than 3,800 hospitals, clinics and physicians.

In addition to the notes, MModal had about $520 million in loans, with a $75 million revolving facility and a $445 million term loan, according to data compiled by Bloomberg. The revolving facility is fully drawn and $424.6 million is outstanding on the term loan, according to court papers.

Moody’s Investor’s Service this month downgraded MModal’s credit ratings, cutting its senior secured debt to Caa2 and the senior unsecured debt to C. Moody’s cited “continuing deterioration in sales and liquidity” and said it expected a “very low recovery” on the bonds and a “high” recovery on the revolving and term loans.

The lead case is In re Legend Parent Inc., 14-bk-10701, U.S. Bankruptcy Court, Southern District of New York (Manhattan.)

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