Host Greg Hawver welcomes his McGuireWoods colleague Mark Freedlander, head of the firm’s Restructuring & Insolvency Practice Group, and Robert Orr, principal at Sandton Capital Partners, to discuss their recent restructuring of a distressed healthcare business. The team took out the existing senior secured lender and allowed an out-of-court restructuring of the business and its capital structure. As Robert explains, they recognized that the company faced challenges – including unsustainable debt – but also that it had a “reason to exist.” “We just needed to solve the balance sheet problems,” he says.

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

You are listening to Deal-by-Deal. A McGuireWoods podcast. Deal-by-Deal invites you to conversations with experienced independent sponsors and other private equity professionals. Join McGuire Woods Partners, Greg Hawver and Jeff Brooker as they explore middle market private equity M&A, to provide you with timely insights and relevant takeaways.

Hello and welcome to Deal-By-Deal, a podcast for independent sponsors and other investors in middle market private equity transactions. My name's Greg Hawver. I'm a partner in the private equity group here at McGuireWoods, and I'm happy to be joined by two experts in the world of restructuring and solvency and distress transactions today. We've got my partner Mark Friedlander, who heads our restructuring and insolvency practice. And we're also joined by Rob Orr at Sandton Capital Partners. And today we're going to be diving into the world of distress transactions. It's not a topic that we've hit in a while here on the Deal-by-Deal podcast, but we've got two real experts. So starting with Mark, why don't you tell us a little bit about your practice, Mark.

Thank you. I appreciate it, Greg. Again, my name is Mark Friedlander. I am a partner with McGuireWoods. I am a department chair actually co-heading our restructuring practice. My practice is very much a business-oriented practice where I consider myself to be a distressed business lawyer much more so than a bankruptcy or insolvency lawyer. I've been with the firm for roughly 25 years and been practicing approximately 30 years at this point. I am happy to introduce Rob Orr. Rob is a principal of Sandton Capital. McGuireWoods has a long-standing partnership with Sandton Capital where we've worked with them in any number of different matters. I in particular have worked closely with Sandton in any number of distress matters. Sandton Capital is a distressed debt fund that is very nimble and flexible in what they do. And likewise, very supportive of existing management teams. Rob, I'll defer to you to describe yourself and Sandton Capital further, if you don't mind, please.

Sure. Well, thanks Mark and thanks Greg for having me on. As Mark indicated, Sandton Capital is a distress-oriented investment fund. We started Sandton in 2009. I think we all remember what the world looked like in 2009, and there seemed to be a need for flexible creative capital to help businesses that were otherwise good and viable operating entities, but who were dealing with difficulties on the debt side of their balance sheet. And so we created Sandton to be a bit of an off ramp for these businesses, so to help get them out of difficult borrowing situations, to help fix whatever was wrong with the balance sheet and get those businesses back moving in the right direction again. We're very proud of the fact that we've been doing this for 15 years. We've now raised six institutional funds. Our most recent fund we raised earlier this summer, it was a $500 million committed capital fund. And we're continuing to deploy into a wide range of opportunities to help middle market businesses work through things.

Mark, I know you had noted some of the war stories that you and Rob have been through over the years. And maybe it would be interesting to our listeners to just kind of go through one of those stories and some inflection points along the road with the portfolio company and how Sandton stepped in and you all navigated that.

Sure, without question I'll start and obviously Rob has a lot to add to the story as well. I think it's best that we set context by suggesting that this is a very recent story. It's one that we worked with Sandton on in 2024. It involves the healthcare space, generally speaking. And with respect to this particular matter, sometimes it's the case that we bring Sandton into things. Other times it's the case that Sandton has opportunities that they bring to us to work with them. And this is an instance where Sandton Capital came to us based on an existing relationship they had with a senior secured lender in a very distressed situation, with a exceptionally messy capital structure and some other difficulties associated with the business. And Sandton was able to step in work with McGuireWoods to take out the existing senior secured lender, and allow an out of court restructuring of both the fundamental business and its capital structure. So from there, Rob, I would ask you if you could please fill in some more details and we can then go step by step about how we approach things and what was accomplished.

Absolutely. Well, thanks, Mark. Yeah, so to set the table a bit here, this was as Mark mentions, a healthcare business backed by an independent sponsor. That independent sponsor invested in the business several years ago. As part of the transaction, they ended up taking down $30 million of senior secured bank debt. And due to a number of different challenges that the business faced over the years, they got to a point where that amount of debt was unsustainable for the business on a go forward basis. We were brought into the situation by a debt advisory firm that was trying to help solve the problems. The company had tried to run a sale process previously. That sale process failed due to the over indebtedness of the business and some other complicating factors with the control transaction.

So the debt advisory firm was looking for a solution. We looked at it, quickly realized that it was on the one hand a very difficult situation. But on the other hand, a business that had a reason to exist and a management team and a sponsor who we liked and felt we could get comfortable with. And we just needed to solve the balance sheet problems.

Rob, maybe tell us a little bit more about that. That's interesting to me is, for experts like you when you're seeing companies, some are sort of going off a cliff. They're not making any money. The business model just doesn't work versus some maybe like this company where you say it has a reason to exist and it's maybe a good company but for a couple factors. What are some of the factors? Is it just over-leverage, debt that doesn't make sense? How do you parse out, again, what's a company that you would want to invest in versus ones you would stay away from?

Absolutely. And sure, I don't have to tell you every situation is a little different. But what we're looking for are specific identifiable reasons why the business got into the situation that it's in. And reasons that we can underwrite to why those same issues will not happen in the future. So an obvious one that everyone looks at now, COVID business interruptions. So that's something you can see what that did to the business. You can think about what the future looks like on the other side of COVID, so you can sort of compartmentalize that event. In the case of this particular business, there was a bit of a business model change that involved a period of operating losses. There were also several personnel changes that led to some period of operating losses. And additionally, there was an expansion of the business that due to a number of factors, took longer and cost more than was originally anticipated. But that you could see the positive results coming in the near future.

So we looked at all of that and the management team and the sponsor and we said, this is a good business. It's in a vibrant growing market. It's a sector of the healthcare industry that is growing and has relatively healthy reimbursement margins. And so we were able to get comfortable that this business would be around for years to come. Now, I should say as part of that, we had a sense of all of those things at the beginning but we did not know with certainty. And that was one of the reasons that my first call on this deal was to Mark, one because I knew that Mark could help with all of the messy and difficult restructuring issues here. But I also knew that Mark sits at the front of a very capable team at McGuireWoods that could speak to all of the different issues here that we needed to get comfortable with. So at various points in this process, and I'll let Mark talk more about the specifics, but we leaned heavily on the restructuring group at McGuireWoods. We leaned heavily on the front end originations team at the group.

They had healthcare law experts that we relied upon. We even brought in some of the government relations consultants in Washington D.C. to talk to us about the reimbursement paradigm for this particular business. So really we took down the sum of the McGuireWoods offering to get this deal done.

And it is the case, Rob, thank you for your compliments of course. But it is the case that the transaction that we're speaking of was a true sweet spot for McGuireWoods because of the various groups that we do have and the amount of work we do in this space. We were able to provide Sandton guidance about some real concerns that they had. As gating items, the regulatory scheme and the reimbursement scheme were both very important to Sandton Capital. And it was the linchpin of their being able to do something here was their comfort level based on input and diligence from McGuireWoods. That they were going to buy debt and invest in a business that was really viable going forward, and wasn't going to be subject to very substantial changes in either regulations or the reimbursement scheme itself.

And Rob, we did mention previously that in this situation there was an independent sponsor involved that was the ultimate owner of the business. And it's the case here that the restructuring allowed for the independent sponsor to further invest in the business. Are you able to help everyone appreciate what transpired in the matter that allowed and encouraged the independent sponsor to further invest in the business?

Absolutely. So as you mentioned, it was an independent sponsor, which is interesting in its own right. And maybe at the end we'll have some time to talk about what we're doing generally for the independent sponsor world. But we're seeing more and more transactions in this space, because of the way these deals are funded there's often a limitation on the part of the sponsor in their ability to continue to support companies on a follow-on basis. When maybe the waters get a little choppier because it's not a large committed fund that they can draw down additional reserves from. And so in this particular situation, there was a bit of a standoff in place. The business needed new liquidity. The senior secure lender did not want to put additional liquidity into the business. The sponsor had difficulties on their own right to put additional money in. And frankly, they were so far out of the money that from a strictly rational standpoint, it was hard to justify continuing to put additional time or money or other support into the business given the position of equity relative to the value of the debt.

We looked at that situation and we realized that if we could acquire the existing bank debt and come up with a restructuring proposal, we could make the go-forward balance sheet attractive enough that the sponsor would have reason to want to continue to support this business. Again, both from a time and dollar standpoint. And so, it was really a process of getting them out of a balance sheet situation that was not particularly attractive for them. And creating a new balance sheet that had a lot of potential upside for them and being willing to partner with the company, with the management, and with the sponsor to rebuild this business, to solve the working capital issues and get them moving again in the right direction.

Rob, it's my experience in working with Sandton Capital that Sandton, I think almost without exception in the matters that we've worked on together, has supported both existing management and ownership of businesses where Sandton has determined to either invest or to lend money to. So maybe you want to spend a few minutes, if you don't mind, just talking about the theory of Sandton behind supporting existing management and ownership in the work that Sandton does.

Yeah, these situations are always very difficult and the availability of debt on the front end of deals is great, and it allows a lot of independent sponsors to acquire businesses with relatively affordable capital structures. And that's all well and good on the front end, but obviously things don't always go the way we think they're going to go. And so by the time we get the phone call, things have gotten pretty rough and typically the incumbent lender and the sponsor are not getting along. Again, there's often some sort of liquidity crunch that is bringing things to a head. So we look at these situations and we really think about, again, as I talked about earlier, does this business have a reason to exist? Should this business continue forward? And what does it look like for that business to continue forward? For our purposes, we never want to get involved in a situation that we think is going to end up in a liquidation or other downside and solvency procedure.

So we're really making a bet that we think this business can make it. And to do that, we need to get into the business, we want to meet with the managers, we want to meet with the sponsor. And frankly, in the healthcare space we want to meet with the providers. One of the things that we talked with the McGuireWoods healthcare team quite a bit about was position alignment. And so we were not going to do this deal if we were able to secure a better or newer physician alignment model for this business going forward. So we spent a lot of time on that. We spent a lot of time with the management team. And we really got to the point where we felt that we were the right partner and that we had the right balance sheet for this business. And the turnaround is well on the way towards achieving all of those things.

That's great. I just want to highlight for our listeners, what I'm picking up is that as an independent sponsor, you have a more limited toolkit when your company is facing financial distress than a private equity fund. And a PE fund can either draw down more capital and that makes lenders happy and can smooth over some of those choppy waters. PE funds can use kind of like a port code note structure where you're borrowing capacity up at the fund level to drop money in. And none of those options are open to the traditional independent sponsor. So I think that this is an important point, and it's good to know that Sandton Capital and others are out there to provide these creative solutions. When it's just you've got an angry senior lender and less tools in your toolkit, you need someone create like Rob to help work through that.

So I wanted to highlight that point and also wanted to just out of curiosity, so once you've structured this deal, Rob and Mark, and you've decided that you're going to move forward with it, how did the mechanics work with Sandton coming in, senior lenders moving out? Anything to think about there from a pitfall perspective?

Well, it's a good point. These deals have a lot of moving pieces because again, you've got at this point four parties at the table. You've got the existing bank, you've got the company, you've got the physicians and you've got Sandton. And there is quite a bit of documentation that's got to go. It has to come together all at the same time. And so this is again where we relied very heavily on Mark and his team. There's note sale documentation. So anytime we're purchasing a loan from a bank, there's a certain set of docs that have to do with the note purchase. We also, in this particular case, took the existing credit agreement and put it through a very, very heavy markup to document what the go-forward agreement was going to be between us as the new lender and the company. And then there were some separate agreements relating to how we were going to participate with the company in the upside that was created through all of this. And then there was some documentation flying back and forth between the business and their physicians around alignment issues.

All of that stuff had to be done. And it had to happen very quickly. And that's one of the things that people don't always appreciate about our world. It's like these things have to move lightning quick because by the time we get that phone call, again, there's usually pretty pressing liquidity needs. So we knew we needed to move fast. We knew it was going to be complicated and messy. And again, that's exactly why I called, Mark.

Thank you, Rob. And the other thing that I would note in these situations is that in large part, a fund like Sandton has to walk a very thin tightrope. There are instances where Sandton is front and center in terms of negotiations. And there are other instances where Sandton really just needs to be quietly behind the scene, allowing the company to do its thing with Sandton providing input and thoughts. So maybe, Rob, we want to talk for a few minutes if you don't mind, about that balancing act. And how and where you typically find yourself as front and center and a renegotiation of matters. And where you kind of need to just stand back and provide a bit of input as opposed to taking the lead.

I think what we find in a lot of cases is when you have that intractable issue of the existing debt and the company that can't service that leverage, there really does need to be third party capital at the table. For a lot of reasons banks don't typically sell loans back to borrowers or back to sponsors. And so you need somebody who's kind of not part of the existing situation to come in, assess it, importantly, value it and effectuate that transaction. And so we always like to start with the company and understanding what their needs are. Not just, hey, how do we get sort of your existing debt stack brought down a bit, but also what are your go-forward liquidity needs? How much new money is going to be in there? What is the turnaround look? So we have to assess all of that. And then we have to approach the existing lender and put forward a deal that makes sense to them and that's better than their other available options.

And it takes a lot of transparency, a lot of communication, and sometimes it's challenging because there are aspects of the negotiation between us and the company that are protected by confidentiality with them. And then there are aspects of our conversations with the bank that are protected by confidentiality with them. And so we just think it's very important to be transparent with everybody about exactly what's going on, what you can share, what you can't share. I will say one of the advantages we have is that having done this for 15 years and purchased billions of dollars of bank debt over that time, we have not only the sort of institutional knowledge, but also the relationships. It's not always obvious who inside any particular bank would be the decision maker on a deal like this. And so because of our experience and our track record working with lenders, we almost always know exactly who to call or at most it's two phone calls away. And then when we establish that dialogue, we've got a lot of credibility because we have a track record of having executed deals like this in the past.

And that's really important because these are high stakes, high emotion, fast moving situations. And so everybody involved wants to know that whoever they're dealing with is someone that can be relied upon to get the deal done the way they said they're going to do it on the timeline they said they could meet. And that's really what we pride ourselves on.

And Rob, in this particular matter that we're currently discussing, my observation is that it had a level of complexity that you ordinarily would not be able to address out of court. In this particular instance, it was the existing lenders' relationship with Sandton Capital, it's my observation, that caused them to hang in there and work with us in a way that another lender in another situation may not have been willing to do. It was really that relationship that caused them to have the level of flexibility and hang in there while we worked through things that actually transpired here.

You're exactly right. And while this particular deal that we're talking about didn't get quite to this point, we've had situations where companies were about to miss a payroll cycle, which as we all know, you can't ever miss payroll. And we've had to tell banks, look, we're in this. We're going to get this deal done but you got to get this company through the current payroll cycle and we'll close this deal immediately afterwards. Or give us one week prior to whatever big cliff of next actions, whether it's a bankruptcy or a receivership or something like that, the bank may be contemplating. What we want to do is say, "Hey bank, give us a couple of weeks. Let us get in here, see what's going on and let us get this deal done." And so not just anybody can make that phone call. Again, you've got to have that track record. You've got to have the relationships and the credibility that it takes to have a bank be patient in a situation where they otherwise would be very impatient.

And Rob, I would also note that while it may seem patently obvious, it warrants discussion. The aspect of Sandton Capital coming to situations involving healthcare providers, is something of a different type of dynamic because of the role that the physicians play. Obviously they create the revenue, and likewise in many instances, they're an integral part of the capital structure as well. So if you could just talk about please, some of your experiences in this space in particular and how you deal with physicians as a general proposition, I think that would be helpful.

Well, the short answer is very carefully, that's how we deal with physicians. They had a lot of leverage in these situations. Any business where your assets walk out the door every day and come back the next morning, you've got to be very careful. And good physicians are in high demand. They know that. And it's important that you treat them as such. In this particular case, we were very upfront with everyone involved that we were not going to do this deal if we were not able to directly interface with the physicians, and get a level of comfort that they were inclined to continue to be part of this organization well into the future. And so we really spent a lot of time on that. And that's not normal lending, but in the special situations healthcare world, it's absolutely critical.

As you talk about unlocking value, Rob, we just mentioned the transaction that our respective firms worked on involving an independent sponsor. What is the current thinking and what is Sandton Capital really doing with independent sponsors more broadly as opposed to just the deal we spoke about in particular?

That's great. I'm really glad you asked that. So as you know, Mark, I was just at the McGuireWood Independent Sponsored Conference in Dallas and really enjoyed the experience. I was blown away by the level of activity in this space, the number of sponsors that were there. But even more so the amount of leverage that's available for this market. There were many, many lenders there. And I met with a bunch of them who are excited and willing to lend into this space. And a lot of these deals are asset light enterprise value deals. So that's great for the sponsors on the front end, but as I mentioned earlier, it really creates difficulties when things go side of cooling of the economy from the past couple of years. I think the unfortunate reality is not all of these independent sponsor financings are going to work out the way they were intended. And I think a lot of them are going to result in challenging restructurings.

And we just want to be sure that people know that they can call on Sandton. We're creative, we're flexible and we're well capitalized. And I think we've got both the experience and the capital and the relationships to solve these deals. And we're excited to be a resource for some of the existing deals in this space.

And I can vouch for the fact, without really touting your own horn too loudly, that the flexibility and creativity that Sandton brings to the table does allow a lot of things to get done that otherwise just would not be possible. So you're to be congratulated for that.

Well, and not to have too much of a mutual admiration party, but a lot of that creativity comes from working with you and the McGuireWoods team. And you do a great job of keeping me out of trouble. Sometimes the creativity can be too much and you have to reel me in. So it's a great partnership and we've really valued it over the years.

Great. Well, thank you both for your time. This was really informative for me. And I think we, again, really appreciate it and this is certainly going to be helpful for our listeners. So thanks for all of your time.

Thank you.

Thank you, Greg.

Thank you for joining us on this episode of Deal-By-Deal, a McGuireWoods podcast. To learn more about today's discussion and our commitment to the independent sponsor community, please visit our website at mcguirewoods.com. We look forward to hearing from you. This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved, and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. And should not be construed as an offer to make or consider any investment or course of action.