Decoding the DIP: Understanding the Key Changes in Steward Health Care's Amended Credit Agreement

You can find the court motion for this post here, in Google Drive.

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This document is a notice regarding an amendment to a loan agreement for Steward Health Care System LLC, a company undergoing a Chapter 11 bankruptcy restructuring process. Here's a breakdown to help you understand:

* Steward Health Care System LLC filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Southern District of Texas. The case number is 24-90213 (CML).

As part of the bankruptcy proceedings, Steward secured *new financing called "Debtor-In-Possession" (DIP) financing**, specifically a "FILO DIP" loan. DIP financing allows companies to continue operating during bankruptcy.

* An initial order (the "FILO DIP Order") was issued by the Court on July 10, 2024, outlining the terms of the DIP financing. This included provisions for obtaining the loan, using existing cash, granting liens to lenders for security, and providing superpriority administrative expense claims (meaning these claims get paid before others in bankruptcy).

* The FILO DIP Order also allowed for amendments to the DIP loan agreement under certain conditions. These conditions included obtaining consent from various parties, such as a Junior DIP Secured Party, the Creditors' Committee (a group representing unsecured creditors), and certain lenders.

* However, due to a global settlement with various stakeholders (including lenders and the Creditors' Committee), some of those parties (the Junior DIP Secured Party and the MPT Secured Party) released their claims against Steward and were repaid in full. This means their consent is no longer required for amendments to the DIP Credit Agreement.

* This notice is specifically about an amendment (the "DIP Amendment") to the FILO DIP Credit Agreement. Key aspects of the amendment include:

* Extending the maturity date of the loan from December 31, 2024, to January 31, 2025. This gives Steward more time to repay the loan.

* Waiving certain requirements that Steward previously had to meet under the original loan agreement.

* Amending specific provisions in the agreement, such as how payments are handled and how certain financial metrics are calculated.

* Adding new covenants (promises) from Steward, like providing specific financial reports to lenders and consulting with advisors on accounts receivable collection.

* The DIP Amendment includes an updated budget (Annex A) and a schedule of previous Term Loan repayments (Annex B).

* The Creditors' Committee consented to the DIP Amendment, making it effective. This means the amendment is legally binding.

In essence, this document shows Steward Health Care System LLC modifying its financing arrangements as it navigates its bankruptcy process. The amendments are designed to give the company more financial flexibility and time to restructure its operations while ensuring creditors are informed and protected.

It's important to note that this is a high-level explanation based on the provided document. Further details and context might be found in other court filings or related documents.

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You're right to notice that the term "FILO DIP" suggests a distinction from a traditional DIP loan. While the provided source doesn't explicitly define "FILO DIP," it offers clues that point to key differences:

* Focus on "First In, Last Out" (FILO): The repeated use of "FILO" in the document's terminology, such as "FILO DIP Order," "FILO DIP Loan Parties," and "FILO DIP Secured Parties," suggests a structure where certain lenders ("FILO DIP Secured Parties") hold a prioritized position in repayment. This "First In, Last Out" approach implies they would be among the last to be repaid in the event of liquidation or restructuring, indicating they may have taken on higher risk.

* Involvement of Prepetition Secured Parties: The document mentions "Prepetition ABL/FILO Secured Parties," indicating some lenders were already secured creditors before the bankruptcy filing. These lenders likely hold liens on Steward's assets from before the Chapter 11 process. Their continued involvement and the need for their consent for amendments suggest their pre-existing claims are integrated into the FILO DIP structure.

* Global Settlement Impact: The source highlights a "global settlement" that significantly altered the dynamics of the FILO DIP. The settlement resulted in certain parties releasing their claims and being repaid, simplifying the amendment process. This settlement likely played a role in shaping the unique characteristics of this specific FILO DIP.

Based on these points, a FILO DIP appears to be a specialized form of DIP financing that prioritizes repayment to certain lenders, possibly those who provided financing before the bankruptcy (prepetition) and/or those willing to take on higher risk by being last in line for repayment. This structure likely reflects the complexity of Steward's financial situation and the need to balance the interests of various stakeholders during the restructuring process.

To fully grasp the nuances of a FILO DIP and how it differs from a traditional DIP, you might want to explore legal and financial resources beyond the provided document. Consulting bankruptcy case law, financial restructuring guides, or expert commentary could offer more detailed insights into this specific financing arrangement.

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FILO DIP (First-In-Last-Out Debtor-In-Possession) financing is a specialized form of bankruptcy financing that combines the characteristics of both DIP and FILO loans.

## Structure and Position

FILO DIP financing maintains a senior secured first priority lien on the company's assets while being structured as a "last-out" position. This means that while it shares first-lien status with other DIP loans, it gets repaid after the first-out DIP debt is fully repaid.

## Key Features

- Security: Maintains senior secured first priority lien status

- Collateral Coverage: Can be secured by all company assets or limited to specific assets like:

- Current assets (cash, receivables, inventory)

- Fixed assets (equipment, real estate)

- Intellectual property

## Advantages

FILO DIP financing provides several benefits to distressed companies:

- Offers greater debt capacity than traditional bank-only DIP financing

- Requires minimal maintenance and reporting obligations

- Generally structured with no amortization requirements, preserving cash flow

- Uses simpler legal documentation compared to multiple-tranche financing

## Usage Criteria

Companies seeking FILO DIP financing typically should have:

- Stable and predictable cash flows

- Reasonable liquidity

- Total debt-to-EBITDA ratio under 6.0x

- Total indebtedness not exceeding 65-70% of enterprise value

The financing is particularly suitable for companies that need 10-20% more capital than what traditional asset-backed DIP structures can provide[9].

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DIP lenders agree to FILO structures for several strategic and financial reasons:

## Risk-Return Profile

- They can charge higher interest rates due to the last-out position, compensating for the increased risk

- The structure maintains senior secured first priority lien status while offering greater potential returns

## Strategic Control

- FILO DIP lenders can maintain significant control over the bankruptcy process and restructuring

- Private equity sponsors often use FILO positions to maintain ownership control of portfolio companies post-reorganization

## Recovery Protection

Primary Benefits:

- Full utilization of debt capacity when paired with asset-based lending (ABL)

- Recovery through ongoing cash flow generation or refinancing

- In distressed situations, recovery through sale of business as an ongoing concern

## Market Opportunity

FILO structures are particularly attractive when:

- Companies need 10-20% more capital than traditional asset-backed structures can provide

- Borrowers have stable, predictable cash flows

- Total debt-to-EBITDA ratio remains under 6.0x

## Documentation Advantages

- Simpler legal documentation with a single credit agreement

- Limited maintenance and reporting obligations

- Typically no amortization requirements, preserving cash flow

The structure allows lenders to participate in potentially profitable reorganizations while maintaining senior secured status and exercising significant control over the restructuring process.

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The provided notice does not offer a specific rationale for extending the maturity date of the FILO DIP Credit Agreement by only one month, from December 31, 2024, to January 31, 2025. However, the document and our conversation history shed some light on potential factors that might contribute to this seemingly short extension:

* Focus on near-term financial management: The DIP Amendment includes a detailed budget for the weeks ending December 20, 2024, through January 31, 2025. This suggests a strategic focus on navigating the immediate financial challenges and ensuring Steward's operations have adequate funding during this critical period. The short extension might align with a plan to reassess the company's financial position and potentially pursue further restructuring steps or a more comprehensive financing solution after this period.

* Ongoing asset monetization and strategic processes: The document mentions Steward's ongoing efforts to monetize assets, including the sale of Excess Properties and previous transactions like the sale of Stewardship and various facilities. Additionally, there are references to "preparation for strategic processes". These initiatives suggest the company is actively exploring ways to generate liquidity and restructure its operations. The one-month extension could provide a window to advance these processes while maintaining a degree of financial stability.

* Settlement negotiations and creditor dynamics: As discussed in our conversation history, the FILO DIP structure involves various stakeholders, including prepetition secured lenders and the Creditors' Committee. The global settlement that led to the release of certain claims likely involved complex negotiations and compromises. The short extension might reflect an agreed-upon timeline to assess the impact of the settlement and the progress of Steward's restructuring efforts before revisiting the long-term financing arrangements.

While the document doesn't explicitly state the reasons behind the one-month extension, these contextual clues suggest that it could be a tactical decision aimed at addressing immediate financial needs, facilitating ongoing restructuring activities, and providing a checkpoint for reassessing the company's financial strategy.

Keep in mind that this analysis is based on inferences from the provided information. A comprehensive understanding of the rationale would require reviewing additional documentation or seeking insights from individuals involved in the restructuring process.

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You're right, the phrase "consulting with advisors on accounts receivable collection" does seem somewhat vague. Let's delve into the specifics of that covenant and other notable new covenants outlined in the DIP Amendment:

Covenant Regarding Account Receivable Collection:

The DIP Amendment mandates that Steward Health Care System LLC and its subsidiaries "*use commercially reasonable best efforts to facilitate collection of all accounts receivables** which constitute the assets of any Loan Party or any of their Subsidiaries and shall use such proceeds in accordance with the Credit Agreement". This signifies a commitment to actively pursue outstanding payments owed to the company.

Furthermore, the document specifies that Steward and its subsidiaries must "*consult on a reasonably regular basis with**" Berkeley Research Group, LLC (**BRG**) "**regarding the collection of accounts receivable**". This emphasizes the role of BRG, acting as Lender Advisors, in providing guidance and oversight on the collection process.

The covenant also includes an obligation for Steward to "*consider in good faith any feedback from BRG following such consultation**". This implies that while Steward retains control over its collection strategies, it must genuinely consider the recommendations provided by the Lender Advisors.

This covenant, along with the added requirement to provide detailed accounts receivable reports to BRG, highlights a key concern of the lenders: ensuring that Steward is diligently pursuing its receivables to maximize cash flow during the bankruptcy process.

Other Notable New Covenants:

In addition to the account receivable covenant, the DIP Amendment introduces other significant commitments from Steward, including:

* Excess Receipts Amount Mandatory Prepayment: Steward is obligated to make prepayments on the Term Loans every two weeks if actual cash receipts exceed budgeted amounts. This mechanism ensures that excess funds are directed towards debt reduction.

* Reporting Requirements: Steward must deliver comprehensive reports to the lenders, including summaries of accounts payable, disbursements by vendor, and detailed analyses of accounts receivable. This enhanced transparency provides lenders with greater visibility into Steward's financial performance and cash management practices.

* DIP Extension Premium: As part of the agreement to extend the maturity date, Steward grants the lenders "incremental Prepetition Bridge Obligations" or "incremental FILO DIP Obligations". This provision, referred to as the "DIP Extension Premium," essentially compensates the lenders for taking on the added risk associated with extending the loan. The amount of this premium is linked to the "FILO Contribution Amount," which is calculated based on the proceeds from the sale of Excess Properties and other factors outlined in the document.

These new covenants, along with the waivers and amendments discussed in our previous conversation, reflect the lenders' efforts to mitigate risks and exert greater control over Steward's financial decisions during the restructuring process.

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While the sources don't explicitly state that Steward must accelerate the collection of accounts receivable beyond their standard terms, the language used strongly suggests an emphasis on maximizing cash flow as quickly as possible. Here's why:

* "Commercially reasonable best efforts": This phrase, used in the covenant regarding accounts receivable collection, typically implies going above and beyond routine practices. In this context, it suggests Steward should be proactive and assertive in pursuing outstanding payments, even if it means negotiating with customers to expedite payment.

* Focus on liquidity: Throughout the DIP Amendment and our conversation history, there's a clear emphasis on Steward's need to manage its cash flow effectively. The document outlines mechanisms to track cash receipts, enforce mandatory prepayments when receipts exceed budgets, and grant lenders additional security through the DIP Extension Premium. These measures highlight the lenders' concern about Steward's financial stability.

* Role of BRG: The requirement for Steward to consult regularly with BRG (the Lender Advisors) regarding accounts receivable collection further underscores the lenders' focus on maximizing cash flow. It's reasonable to assume BRG would advocate for strategies to accelerate collections, as that would be in the best interests of the lenders they represent.

* DIP financing context: DIP financing is intended to provide a lifeline for companies operating under bankruptcy protection. Lenders providing DIP financing are often particularly sensitive to liquidity risks, as they want to ensure their investment is protected. Therefore, it's highly likely they would expect Steward to take aggressive steps to collect receivables quickly.

While the specific methods Steward will employ to "facilitate collection" are not detailed, the overall context suggests that simply adhering to existing payment terms might not be sufficient. The lenders appear to be pushing for a more proactive approach that prioritizes rapid cash generation.

It's worth noting that attempting to accelerate receivables could potentially strain customer relationships. Steward would need to carefully balance the need for immediate cash with the long-term implications of potentially alienating its customers. This delicate balancing act is likely a key consideration for Steward as it navigates the restructuring process.

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You are asking a great question about the level of detail a court would likely expect to see to determine if Steward Health Care System LLC is genuinely considering BRG's feedback on accounts receivable collection. The source document, unfortunately, uses somewhat vague language, making it difficult to provide a definitive answer. However, combining the information from the sources with a general understanding of bankruptcy proceedings, it is possible to infer some expectations a court might have.

Here are some points a court would likely consider when assessing Steward's compliance with this covenant:

* Documentation of Interactions: The court would expect Steward to maintain detailed records of its consultations with BRG, including meeting minutes, presentations, and written correspondence. These records should demonstrate that Steward actively engaged with BRG and received their recommendations.

* Analysis of BRG's Recommendations: Steward should be able to provide evidence that it carefully analyzed BRG's recommendations. This might include internal memos, financial models, or presentations outlining the potential benefits and drawbacks of implementing BRG's suggestions.

* Rationale for Accepting or Rejecting Recommendations: Crucially, Steward would need to provide clear and well-reasoned explanations for its decisions to accept or reject BRG's advice. If Steward rejects a recommendation, the court would want to see a strong justification for doing so. For example, Steward might argue that a particular strategy would damage customer relationships or be too costly to implement.

* Alternative Strategies Considered: If Steward decides not to follow a specific recommendation from BRG, the court would likely expect to see evidence that Steward explored alternative strategies to achieve the same goal of maximizing accounts receivable collections. This demonstrates a good-faith effort to find the most effective approach.

* Outcomes and Results: Ultimately, the court would likely assess the effectiveness of Steward's collection efforts, considering the impact of both accepting and rejecting BRG's recommendations. If Steward's chosen strategies are not yielding satisfactory results, the court might question whether Steward genuinely considered BRG's advice.

The court's primary focus would be on ensuring that Steward is acting in good faith and taking reasonable steps to maximize the value of its assets for the benefit of its creditors. While the covenant language is vague, the court would likely use a holistic assessment, considering the totality of Steward's actions and the rationale behind its decisions.

Remember, this analysis is based on a general understanding of bankruptcy proceedings and the limited information available in the source document. The specific expectations of a court in this particular case might vary. Consulting legal experts specializing in bankruptcy law would provide more precise insights into how this covenant might be interpreted and enforced.

It is important to recognize that the "genuinely consider" language is intended to give the lenders and their advisors, BRG, leverage without giving them operational control of the Debtor. This type of language is commonly seen in DIP financing arrangements and is often a subject of negotiation between the parties.

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You're asking for clarification on the waivers in the DIP Amendment and how they mitigate risk for the lenders. The DIP Amendment, dated December 31, 2024, is an agreement between Steward Health Care System LLC (the “Borrower”) and its lenders, represented by Brigade Agency Services LLC as the Administrative Agent. The Amendment modifies the original Debtor-in-Possession Credit Agreement, dated July 10, 2024. It includes several waivers for Steward, releasing them from certain obligations that they had previously agreed to.

Here are some of the key waivers granted to Steward in the DIP Amendment:

* Waiver of Mandatory Prepayment Requirement: Steward is relieved from the obligation to make mandatory prepayments on its debt based on asset sales, as originally stipulated in Section 2.11(c) of the Existing Credit Agreement. Instead, prepayments are governed by a new provision that considers factors like Net Proceeds from sales, Approved Budgets, and monetization of accounts receivable.

* Waiver of Financial Reporting Requirements: Steward is no longer required to deliver specific financial statements, including those for the fiscal year ending December 31, 2024. This waiver alleviates the administrative burden on Steward and grants them some flexibility regarding financial reporting.

* Waiver Related to Non-Payment of Approved Unpaid Liabilities: The lenders waive their right to enforce certain consequences for Steward's failure to pay specific pre-approved liabilities, termed "Approved Unpaid Liabilities". This provides Steward with some leeway in managing its payments during the restructuring process.

* Waiver of Defaults Related to Budget Events: Steward is relieved from the consequences of certain past "Budget Events," including instances where their spending exceeded the allowed variance. This waiver essentially offers Steward a clean slate regarding past budgetary deviations.

* Waiver of Defaults Related to Asset Sales and Transactions: The DIP Amendment waives defaults related to certain asset sales and agreements, such as the sale of hospitals to entities like Lifespan of Massachusetts, Inc. and BMC Community Hospital Corporation.

* Waiver of Default Related to ERISA Events: Steward is protected from defaults associated with specific pension plan events, including the termination of the New England Sinai Hospital Pension Plan and potential withdrawal liability assessments from other funds.

Why these waivers mitigate risk for the lenders: 

While waivers may appear to benefit the borrower, they also serve to mitigate risk for the lenders. By granting waivers, the lenders are acknowledging the challenging circumstances Steward is facing and providing them with some breathing room to restructure effectively. This can actually increase the likelihood of loan repayment in the long run. Here's how:

* Flexibility and Focus on Core Operations: By waiving certain reporting and payment obligations, the lenders allow Steward to focus its resources and energy on core operations and restructuring efforts. This can enhance their chances of achieving financial stability and ultimately repaying the loans.

* Preventing a Liquidity Crisis: Waivers related to prepayments and defaults associated with budget events help prevent a sudden liquidity crisis for Steward. This ensures the company can continue operating and generating revenue, which is in the lenders' best interest.

* Maintaining a Cooperative Relationship: Granting waivers can foster a more cooperative and collaborative relationship between Steward and its lenders. This can be crucial during a complex bankruptcy process where the parties need to work together to find solutions.

It's important to note that the waivers are not a free pass for Steward. They are carefully crafted, often with specific conditions and limitations, and are part of a larger set of amendments and new covenants designed to protect the lenders' interests while allowing Steward the opportunity to reorganize successfully.

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You're asking about specific provisions in the DIP Amendment that were amended and how those amendments might benefit the bankruptcy process for Steward Health Care. Here are some key amendments and their potential benefits:

* Modification of the Mandatory Prepayment Clause (Section 2.11(c)): The original agreement required Steward to prepay its debt with 100% of the net proceeds from asset sales. The amendment revises this clause, removing the blanket prepayment obligation and tying it to factors like Approved Budgets and proceeds from specific transactions like the monetization of accounts receivable. This amendment provides Steward with more flexibility in managing its cash flow during the bankruptcy process. It ensures that essential funds are not diverted solely towards debt repayment but can be used for operational needs and restructuring efforts, which are critical for a successful reorganization.

* Deletion of Section 5.16: This section, the specific content of which is not provided in the source, is entirely removed. Without knowing the original content, it's impossible to definitively assess the impact. However, the removal suggests it may have contained restrictions or obligations that were deemed overly burdensome for Steward in its current financial situation. Eliminating unnecessary restrictions can streamline operations and allow Steward to focus on more critical aspects of the restructuring.

* Adding a New Clause (d) to Section 5.04: This amendment introduces the concept of "Approved Unpaid Liabilities," which are essentially pre-approved by the lenders, allowing Steward to temporarily defer payment without triggering a default. This provision offers Steward some breathing room to prioritize payments and manage its liquidity more effectively during the restructuring process. It recognizes that strict adherence to all payment obligations might not be feasible or beneficial in the short term and allows for strategic deferrals to facilitate the overall reorganization effort.

* Amendments Related to Budget Events and Financial Reporting: The DIP Amendment waives certain defaults related to past "Budget Events" and eliminates the requirement to deliver specific financial statements. These changes reduce administrative burdens on Steward and provide flexibility in managing its financial reporting. By waiving past budget deviations, the lenders acknowledge the volatility Steward faced and allow them to focus on future performance and adherence to revised budgets.

* Amendments Addressing Specific Operational Issues: Several amendments address specific operational issues, including defaults related to asset sales, pension plan events, and the maintenance of a particular healthcare institution license. These waivers demonstrate the lenders' willingness to work with Steward to address specific challenges that could hinder the restructuring process.

* Introduction of "Total Professional Fee Disbursements" and Related Amendments: The amendment defines "Total Professional Fee Disbursements" and establishes new mechanisms for tracking and controlling these expenses. By setting limits and requiring close monitoring, the amendment ensures that professional fees, which can be substantial in bankruptcy cases, are managed responsibly and don't drain valuable resources needed for operational recovery.

Overall, these amendments appear designed to strike a balance between giving Steward the necessary flexibility to navigate the complexities of bankruptcy while ensuring the lenders' interests are protected. They aim to facilitate a smoother, more efficient restructuring process that increases the likelihood of Steward emerging from bankruptcy as a viable entity capable of repaying its debts.