Rural/Metro Corporation announced that it had filed a Chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the District of Delaware last week. The Company announced that the bankruptcy action will allow the company to “significantly reduce its debt, renegotiate unprofitable contracts and free up capital for investments to strengthen its business and further improve patient care.”
The statement prepared by Rural Metro said that the “agreement reached includes a significant cash investment from the company’s bondholders to comprehensively address the company’s capital expenditure needs and ensure the company continues to provide industry-leading emergency services to its customers. Rural/Metro anticipates completing its restructuring in the fourth quarter of 2013”.
Will Humble, the director of the Arizona Department of Health Services wrote Rural Metro shortly after they announced that they would suspend payment of a Bond. Humble sent a detailed letter asking for a host of financial and operational information about the company in order to determine whether the company still meets the department’s statutory mandate (ARS 36-2201) and rules requirement (AAC R9-25-912(A)) that they be “Fit and Proper” to run an ambulance service in Arizona. Humble says that to be “fit” the company “must have the expertise, integrity, fiscal competence and resources to provide ambulance service.” Humble gave the company until the end of August to provide the department with the required information. Humble said in a message to the public on the department’s website that he would be “going over the fine details in their response- as the particulars will be a big factor in what we decide to do next.”
Rural/Metro Corporation, on July 15, missed an interest payment on its senior notes due 2019 that were sold to pay for the acquisition, according to Moody’s Investors Service. The company was bought by Warburg Pincus LLC in 2011 for $728 million in cash and debt.
The private ambulance firm serves millions of people who need 911 services in rural areas of Maricopa, Pima, and Pinal counties as well as in 20 other states. Rural/Metro provides emergency and non-emergency medical transportation, fire protection, airport fire rescue, and home healthcare services in approximately 700 communities.
The services are provided under contract with government entities, hospitals, healthcare facilities and other healthcare organizations. Net revenue for the twelve months ended March 31, 2013 was approximately $664 million. “This credit negative event would cause a default under the 10.25% senior notes indenture if the interest payment is not made within the 30-day grace period,” according to Moody’s.
According to the Wall Street Journal, “Rural/Metro’s fast descent into financial distress underlines the perils of debt-fueled buyouts, even in recent years when low interest rates have enabled many companies to cut the costs of debt and push back due dates. Default is always a risk in leveraged buyouts because acquirers boost the debt loads of the companies they buy to help pay for them. But it is uncommon for a deal to teeter so quickly.”
Since the acquisition, Scottsdale, Ariz.-based Rural/Metro has been squeezed between higher debt expenses and declining revenue as the amount it gets paid for transporting patients by insurers or the patients themselves has dropped, according to Moody’s.
Ambulance operators can’t deny emergency transport to uninsured patients, and persistently high unemployment has boosted the number of uncompensated trips Rural/Metro makes, according to Moody’s. At the same time, the difference between what the company charged patients and what insurers have been willing to pay has risen, Moody’s said.
In 2010, the company collected 48 cents on every dollar of ambulance service it provided, according to public filings. The figure declined to 39 cents in 2012 and to 33 cents in the nine months through March 31, Moody’s said. Moody’s also said Rural/Metro changed its accounting for payments this year, resulting in a $35 million decline in net revenue. Rural/Metro declined to comment on its financial performance.
Rural/Metro Corporation, reached an agreement-in-principle on a comprehensive financial restructuring plan that will reduce its funded indebtedness by approximately 50 percent via a conversion of certain debt to equity and cutting its interest expenses in half. According to a statement issued by the company, the financial restructuring process will help “ensure that Rural/Metro can continue to invest in its business, meet the needs of customers, patients and communities and further improve service. Operations are expected to continue as normal throughout the process.”
Scott A. Bartos, Rural/Metro’s new President and Chief Executive Officer, said, “We remain committed to serving our clients and communities, maintaining our relationships with vendors and supporting our employees whose hard work and dedication are critical to our success. We expect to move through this process quickly and to be a stronger, more competitive and more profitable organization.”
Rural/Metro noted that its capital structure was created under different economic circumstances, and making interest payments on the debt while at the same time investing in operations was more than the Company’s earnings could support.
The company intends to use the bankruptcy process to significantly reduce its debt, renegotiate unprofitable contracts and free up capital for investments to strengthen its business and further improve patient care. The agreement reached includes a significant cash investment from the company’s bondholders to comprehensively address the company’s capital expenditure needs and ensure the company continues to provide industry-leading emergency services to its customers. Rural/Metro anticipates completing its restructuring in the fourth quarter of 2013.
In conjunction with the filing, Rural/Metro has received a commitment for $75 million in debtor-in-possession financing (“DIP Financing”) from certain of the Company’s secured lenders. Following Court approval, this financing, combined with cash generated by the company’s ongoing operations, “will provide Rural/Metro with sufficient liquidity to meet its operational and restructuring needs,” according to the company. Additionally the company’s bondholders have committed to invest $135 million additional dollars of new equity in the fourth quarter of this year to complete the financial restructuring.
Rural Meytro currently serves the following communities/fire districts:
Amado
Apache Junction Fire District
Arizona City
Avondale
Carefree
Casa Grande
Catalina Foothills
Cave Creek
Chandler
Coolidge
El Mirage
Florence
Fort Thomas
Fortuna Foothills
Fountain Hills
Gadsden
Gilbert
Glendale
Goodyear
Graham County Green Valley
Guadalupe
Hidden Valley Fire District
Johnson Ranch/San Tan
Litchfield Park
Mammoth
Marana
Maricopa County
Martinez Lake
Mesa
Mount Lemmon
Mountain Vista Fire District
Northwest Fire District
Oracle
Oro Valley
Palo Verde
Paradise Valley
Peoria
Pima
Pima County
Pinal County
Queen Creek
Sabino Vista Fire District
Safford
Sahuarita
San Luis
San Manuel
San Tan Valley
Scottsdale
South Tucson
Sun City
Surprise
Tanque Verde Fire District
Tempe
Tolleson
Tucson
Tucson Country Club Estates Fire District
Yuma
Yuma County