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Unpaid Bondholders Push Care Enterprises Toward Bankruptcy

February 25, 1988|ERIC SCHINE | Times Staff Writer

Care Enterprises, the troubled Tustin-based nursing home company, is being pushed toward bankruptcy by bondholders who refuse to accept the terms of a $68-million bond refinancing package that would suspend already overdue interest payments for one year.

Passage of the financing package would appear to be crucial for Care Enterprises' survival, since it has also been unable to meet the terms on part of its $35 million in bank loans.


The bank lenders, Wells Fargo and Citibank, are apparently pinning their willingness to renegotiate the bank loans on the company's ability to get its bond financing in order, according to George Friedman, a broker with Milwaukee Co., a Milwaukee brokerage that represents 5% of the bondholders.

"It seems that the company is already operating in a state of quasi-bankruptcy right now," Friedman said. "They missed repayment on $5 million in bank loans and they are certainly not paying the bondholders."

The fate of Care Enterprises could be determined by R.D. Smith, a New York brokerage house that specializes in buying debt of bankrupt and near-bankrupt companies and which claims to represent 29% of the holders of a $51-million bond issue. Care has a second bond issue outstanding that totals $17 million.

Care Enterprises failed to make interest payments last December on the bonds. As a result, earlier this month R.D. Smith requested payment in full of principal and interest.

Under the terms of the bond indenture, any group representing 25% or more of the bondholders can demand immediate repayment of the bonds if the company misses an interest payment.

Meeting R.D. Smith's request would effectively force Care Enterprises into bankruptcy because the company lacks the cash or borrowing capacity to make the payment.

'A Pretty Serious Act'

According to Friedman, the company responded to the request by saying that R.D. Smith does not actually represent 25% of the bondholders and has delayed meeting the terms of the indenture.

Both Care Enterprises and R.D. Smith refused to comment on the dispute, but other Wall Street "workout" experts who specialize in the bonds of companies in Chapter 11 bankruptcy proceedings said it would be highly unlikely for R.D. Smith to misrepresent itself.

"Forcing a company into bankruptcy is a pretty serious act," said Wilbur Ross, a senior managing director for the New York firm of Rothschild Inc., which has represented bond and equity holders of such bankrupt companies as Texaco and Continental Airlines.

Ross also noted that it is highly probable that R.D. Smith has a financial interest in seeing Care Enterprises forced into bankruptcy.

By buying Care Enterprises' debt at a discount, and selling at a higher price after the company has been reorganized under Chapter 11, R.D. Smith could make a quick gain on its investment, a technique that it and other Chapter 11 experts have used often in the past.

For instance, R.D. Smith is best known for its success in doubling in eight months its $10-million investment in Dart Drugstores, a Washington-based drugstore chain that defaulted on $160 million of bonds last year, according to Ross.

Care Enterprises, which runs 105 skilled nursing homes, has experienced serious trouble in recent years, sustaining huge losses in 1986 and 1987. Last April, on the same day it reported a $10-million dollar loss for 1986, the company's president, Boyd W. Hendrickson, resigned. In March, Care became the subject of several takeover attempts, including one by Chairman Lee Roy Bangerter's half brother, Ted D. Nelson.

The Columbus, Ohio-based Paradigm Co. has offered to purchase 26 Care Enterprises nursing facilities for $66.2 million, including $18.7 million in cash. Care has charged that the offer is an attempt by Paradigm founder Ralph Hazelbaker to take unfair advantage of Care's financial predicament.

Care's losses have sent the company scrambling for extensions from its bankers and bondholders since last July, when the company secured a crucial, eight-month extension on $14.2 million of bank loans.

Principal Not Repaid

After missing an interest payment on bonds in December, the company was granted another bank loan extension in January when it again failed to make an interest payment--this time for $5 million on bank loans.

Care Enterprises' only apparent alternative to bankruptcy is to persuade 75% of the bondholders to accept the terms of a debt swap offer. If it cannot, its bank lenders will refuse to negotiate further extensions of $35 million in senior bank loans, according to Friedman.

The company has been negotiating with the banks since November and has already missed principal repayment on $5 million of the loans. So far, only about 20% of the bondholders have been persuaded to go along with the package.

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