Financial Struggles and Default Status
Owned by H.I.G. Capital, Wellpath has faced increasing pressure after failing to repay a credit facility that expired on October 1. The company has also deferred interest payments on its other debts, entering into a forbearance agreement with its lenders. Moody’s Ratings has characterized these actions as a default, highlighting the company’s precarious financial state.
Wellpath is not alone in facing difficulties; it is part of a broader trend affecting private equity-owned companies in the prison services sector. Recently, Aventiv Technologies, another player in this space, has been exploring a sale to avert a potential bankruptcy filing, showcasing the challenges faced across the industry.
Background on Wellpath and H.I.G. Capital
Wellpath was formed through the merger of Correct Care Solutions and Correctional Medical Group Cos., both of which were previously acquired by H.I.G. Capital. This buyout firm has made several investments in the prison services industry, including current ownership of TKC Holdings Inc. and previous ownership of Securus Technologies, now known as Aventiv.
The prison services sector has drawn significant interest from private equity firms due to its fragmented nature and dependence on government contracts. However, the industry has encountered a series of obstacles, including rising borrowing costs and increased scrutiny from public officials, inmate advocacy groups, and investors concerned about environmental, social, and governance issues.
Rating Agencies Respond to Financial Distress
Moody’s has placed Wellpath on default status, citing the forbearance agreement and cash flow issues stemming from high labor costs and weak earnings. Similarly, S&P Global Ratings has downgraded the company’s ratings, reflecting its struggling financial performance and substantial debt levels. For the twelve months ending June 30, 2024, Wellpath reported revenues of approximately $2.4 billion, according to Moody’s.
Debt Overview
H.I.G. Capital financed the buyout of Correct Care Solutions with $610 million in leveraged debt. Currently, the company’s first-lien loan of $500 million, maturing in October 2025, is trading at about 61 cents on the dollar. A subordinate $110 million loan due in 2026 is quoted at approximately 40 cents, indicating investor skepticism regarding Wellpath’s financial stability.
As Wellpath Holdings Inc. prepares for what may be a pivotal moment in its corporate history, the implications of its potential bankruptcy filing resonate throughout the prison services industry, highlighting the challenges of managing health care services in a complex and scrutinized environment.
