2023-08-10 23:15:53 ET
Summary
- Cano Health reports abysmal second quarter results and withdraws previously-issued full-year guidance.
- Adding insult to injury, Cano Health warned investors of liquidity issues, raising substantial doubt about the company’s ability to continue as a going concern.
- Recent debt covenant violations resulted in the requirement to pursue a sale of the company or substantially all of its assets.
- At least in my opinion, given the complexity and dismal state of the company's operations, a sale outside of chapter 11 looks unlikely at this point.
- With bankruptcy an increasingly likely outcome, investors should consider selling existing positions and moving on.
After the close of Thursday's regular session, ailing primary care medical services provider Cano Health ( CANO ) reported abysmal second quarter results well below expectations and withdrew previously-issued full-year guidance:
Adding insult to injury, Cano Health warned investors of liquidity issues raising substantial doubt about the company’s ability to continue as a going concern:
(...) The Company currently believes that (...) liquidity is not sufficient to cover the Company’s operating, investing and financing cash uses for the next 12 months. The Company’s ability to continue as a going concern is contingent upon successful execution of management’s intended plan over the next 12 months to improve the Company’s liquidity and profitability (...).
Management has evaluated the significance of these relevant conditions in relation to the Company’s ability to meet its obligations and has concluded that there is substantial doubt about the Company’s ability to continue as going concern within one year after the date that the financial statements are issued.
In addition, Cano Health announced its intent to pursue a sale of the company or substantially all of its assets:
Today, Cano Health announced that it is pursuing a comprehensive process to identify and evaluate interest in a sale of the Company, or all or substantially all of its assets (...).
The Company has engaged advisors to assist in the process. The Company has not set a timetable for the conclusion of this process and there is no assurance that the process will result in any transaction.
Cano Health does not intend to comment while it undergoes this process, unless required by law or the Company determines that it would be in its best interests.
According to statements made in the company's quarterly report on form 10-Q, recent debt covenant violations resulted in the requirement to initiate the sales process in exchange for the lender providing a waiver and limited covenant relief (emphasis added by author):
Thereafter, on August 10, 2023, the Borrower obtained a waiver of such noncompliance and entered into an amendment of the Side-Car Credit Agreement (the “2023 Side-Car Amendment”) under which the Company will not be required to test compliance with the Side-Car Credit Agreement’s financial maintenance covenant until the fiscal quarter ending September 30, 2024.
The 2023 Side-Car Amendment provides, among other modifications to the Side-Car Credit Agreement, that: (i) the Company will formally launch, announce and pursue a comprehensive process in an effort to yield one or more offers for a sale of all or substantially all of the assets or businesses of, or direct or indirect equity interests in, the Borrower and its subsidiaries with a purchase price that includes cash proceeds sufficient to pay the obligations under the Side-Car Credit Agreement, and will use its commercially reasonable efforts to promptly close such a transaction.
While generating sufficient proceeds for the repayment of the so-called " Side-Car Credit Agreement " might be achievable, the company will likely be challenged to satisfy all of its debt obligations, particularly when considering the dismal state of its operations:
Regulatory Filings
At least in my opinion, potential suitors will likely require the company to undergo bankruptcy proceedings in order to obtain the assets free and clear of any interest in a court-supervised sale pursuant to Section 363 of the U.S. Bankruptcy Code as otherwise they might face risks from unfavorable contracts and other obligations potentially attached to the assets.
Given the fact that the company has already retained advisors and considering the notorious stakeholder reference in the press release, bankruptcy looks like an increasingly likely outcome (emphasis added by author):
Cano Health is evaluating strategic interest in the Company to ensure we continue caring for our patients, while maximizing value for our stakeholders ," said Mark Kent, Cano Health's Interim Chief Executive Officer.
Equity holders should also keep in mind that under chapter 11 a host of unsecured claims would also rank ahead of them.
Bottom Line
Following an abysmal second quarter and recent debt covenant violations, Cano Health appears well on its way to become the next busted SPAC deal.
At least from my experience, a sale of the company or substantially all of its assets outside of chapter 11 would be highly unlikely, particularly considering the complex nature and dismal state of the company's operations.
Under a bankruptcy scenario, considering unsecured claims, fees and interest payments, I would estimate sales proceeds of at least $1.5 billion being required for equity holders to recover at least a small portion of their investment.
Judging by the shares' 50%+ collapse in after hours, market participants seem to have arrived at similar conclusions. As a result of Thursday's disclosures, I would expect analysts to largely throw in the towel on the company next week.
With bankruptcy an increasingly likely outcome, investors should consider selling existing positions and moving on.
For further details see:
Cano Health: Bankruptcy Likely After Dismal Q2 Results And Debt Covenant Violations