From cradle to grave, private credit has got your, erm, back. In recent years, numerous private credit firms have eagerly embraced financing hospice care service providers, and new deals have emerged recently that will continue to test direct lenders’ appetite for the sector.

Private equity firm Linden Capital, for instance, is on the brink of acquiring two large assets in the form of St. Croix Hospice and Agape Care Group, with a combined LTM EBITDA of up $175m.

However, operational issues stretching from labor to regulation make hospices a complex debt proposition. Even the classic buy-and-build strategy beloved by sponsor-backed companies is complicated by the sector’s unique integration risks.

“We view them [hospice financings] as tougher deals,” one private credit lender told 9fin.

Pricing pinches

The complexity of the hospice sector is reflected in the range of spreads historically commanded.

9fin’s BDC holdings data shows that what private credit firms can secure in the sector really can vary from company to company.

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Meanwhile, although the final financing terms remain under wraps, St. Croix’s current credit facility, supported by Benefit Street Partners, is priced at a spread of SOFR+525bps, according to 9fin’s database.

The range of spreads fits squarely into what middle-market lenders are hoping to achieve. But the pressures on where a private credit firm can negotiate pricing appear to be less influenced by competitive lender dynamics and more to do with whether the asset is getting financed at all. For some steer clear of the sector.

At least that is the opinion of one direct lender: “The issues on the space tend to be more go versus no go. So the fact that a lot of people stay away would likely mean higher spreads and lower leverage.”

On the flipside, the attraction for lenders is the familiar buy-and-build model often seen across the healthcare sector. But an acquisition strategy has to take into account the integration risks unique to the hospice sector. A hospice’s reimbursement framework, for instance, can distort operating priorities.

For lenders, this means underwriting is a question of assessing how business models align with patient care standards and compliance requirements. An issue that, according to a report from Mertz Taggart, a healthcare M&A advisory firm, has made closing transactions in the space harder, even amid strong demand for hospice assets

Moreover, there’s often systemic pressure to admit patients sooner than necessary and to restrict the level of care delivered, a lender noted. “It’s not that everyone’s acting in bad faith, but the business model can create incentives that lead to problematic behavior,” said the first direct lender.

Care as carry

Nevertheless, there is a myriad of reasons why the hospice sector appeals to private credit firms — from the business model to the strong growth fueled by rising demand.

“Hospice care remains a highly attractive sector for lenders due to its strong credit profile, high cash flow, and minimal capital expenditure,” said James Clark, managing director, healthcare & life sciences group, at investment bank Harris Williams, in an interview with 9fin.

A rising demand for end-of-life services, driven by an aging population and longer life expectancies, has spurred a surge in investor interest in hospice care assets in recent years. And 9fin sources say that investors have been enthusiastic about sub-sectors like home-based healthcare and skilled nursing, and hospice care overlaps with both without the potential downside.

“Some of the other sectors within home-based care have been having some challenges. For example, on skilled home health, there's been a shift from Medicare reimbursement to Medicaid, which has a lower margin, so that's been a little bit challenging”, an investment banker focused on healthcare mergers and acquisitions told 9fin.

“On the skilled side, there's a lot of Medicaid uncertainty right now, whereas hospice has had year-over-year reimbursement increases. So the financial outlook is pretty strong”, they added.

In fact, the sector benefited from a stable reimbursement environment, with Medicare rates increasing by an average of around 2% annually over the last nine years, Harris Williams’ bankers pointed out in an article late last year.

Moreover, financial losses in the sector are rare and typically result from company-specific factors rather than systemic issues, said Harris William’s Clark.

“There are routinely transactions each year where private equity can successfully exit their investments in this sector. So I think overall, it's made it a pretty attractive space, and we haven't really seen any slowdown in interest,” said the investment banker mentioned above.

Equity story

So, what’s behind some of the recent exits? Since the days of cheap debt ended with the Federal Reserve’s rate hikes in early 2022, M&A activity has slowed down. Higher borrowing costs have made it harder for private equity firms to agree on asset values, creating a gap between buyers and sellers.

After a record-breaking 2021 and several preceding years of market enthusiasm, private equity firms have been holding onto assets to capitalize on high valuations. But keeping these investments longer is increasing pressure to deliver returns to LPs, and recent headlines have shown that many have to accept selling at lower multiples than previously envisioned.

Rising interest rates have probably played a role in the decline of deal activity in the hospice sector since 2021, since the market has never reached such heights in volume.

Source: Mertz Taggart

Many of the examples above are assets that have reached the typical five-to-seven-year hold period. For HIG has owned St. Croix since 2021 and Sage Hospice since 2018, while Agape has been held by Ridgemont since 2021.

During those peak years, hospice care assets were trading at multiples as high as 20x-21x, according to 9fin sources. Sponsors today are, however, unlikely to recoup such big sums they paid in those giddy times.

In the current market, businesses in the sector are changing hands at significantly lower levels — in the low to mid-teens, around 13x-14x on average, sources said.

That said, Agape sale might stand out from that if it can fetch the 17x-18x multiple that 9fin had reported it was set to secure. That range could represent a middle ground acceptable to both buyers and sellers navigating the market.

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