Due to the sheer number of creditors, the company is not expected to reach a consensual deal under its conciliation process, a source close to the company told 9fin on Monday. The conciliation process can last up to five months. The aim, instead of implementing through conciliation, is likely to be gaining majority consent to move into an Sauvegarde Accélérée procedure.

Under an Sauvegarde Accélérée the group requires consent from two-thirds of its financial creditors. Remaining unconsenting creditors can then be bound by the plan. Creditors will be grouped according to their economic interests and ranking.

Last week the group launched its second conciliation process this year to equitise €4.3bn of debt sitting at the parent company Orpea S.A, amending covenants and obtaining some new money financing, as its debt burden becomes unsustainable in the current inflationary environment.

“The highly inflationary economic environment and the consequences of the strategic and financial review conducted…have led the Company in a situation requiring to renegotiate its debt, including the covenants contained in many of its financing lines, which may not be met as they stand at 31 December 2022,” the group said in its release.

The source close said that the company itself is doing well and it expects that by 2025 it will return to normalised EBITDA levels. The proposed debt restructuring will ensure the company has the proper capital structure and liquidity to make it through the next three years.

“The market will have to acknowledge that this new money need will mostly likely come by way of equity with some new super senior debt,” the source said. They emphasised however that the company will try to keep the additional debt to a minimum to avoid adding too much more to its debt pile.

Creditors holding unsecured financial debt of Orpea S.A are invited to organise themselves in order to facilitate future discussions with the company.

Six French banks, referred to as G6, that lent the full €3.2b of secured debt financing in May (tranche A, B and C) are being advised by Ondra and De Pardieu, the source said.

The company has appointed Rothschild & Co and Perella Weinberg Partners as financial advisors and White & Case and Bredin Prat as legal advisors.

In its first conciliation process in June 2022 the group secured €1.73bn of new liquidity plus an elevation facility (optional syndicated term loan) of up to €1.5bn, which it expected to tide it over for the next 12 months. According to the Q2 22 report, the company had drawn down a cumulative amount of €2.25bn million under the above-mentioned credit agreement as at 27 September 2022, of which €796m is under the optional term loan.

The debt secured in the first conciliation procedure will rank pari passu to any new debt secured in this second conciliation procedure. The company intends to use the remaining €979m available under the elevation facility, which is still fully available.

In terms of the change in ownership, the source said that creditors are allowed to take over a French care home as long as they obtain regulatory approval above a certain threshold for non-European investors. The company wants to avoid being fully owned by distressed creditors, so hopes to attract capital from French institutional investors as well, the source said. The source added that other French care home businesses may not be able to invest in Orpea due to anti-trust issues.

The source said the banks only have marginal cross holdings of secured and unsecured debt so they will not be impacted by the groupings according to security under a sauvegarde procedure.

The Schuldschein debt will be treated like the rest of the unsecured debt, the source said. The creditors will be asked to accept the restructuring on a voluntary basis or be subjected to a cross-class cramdown.

Orpea will present further details on its transformation plan to creditors on 15 November 2022. The information will be made available to the wider market in a release following the call, the source said. The group also plans to announce its third quarter 2022 revenue on 8 November 2022 after market close.

The amount of gross debt due as of 31 December 2023 (as calculated as of 30 June 2022, pro forma for drawings made as of 27 September 2022) is €2.4 bn, according to the group’s release.

According to 9fin’s calculations only €647m of unsecured debt sits outside Orpea SA.

The group estimates the ongoing strategic review process could result in asset impairments at 31 December 2022 between €2.1bn and €2.5bn before tax.

The group’s Q2 22 and pre-restructuring capital structure is here and 9fin’s analysis of the second conciliation process is here.

Orpea operates in 22 countries and covers three core businesses: care for the elderly, post-acute and rehabilitation care and mental health care. It has more than 71,000 employees and more than 255,000 patients and residents each year.

Public prosecutor investigation

CEO Laurent Guillot said in the release on the second conciliation: “The malfeasance and ethical misconduct, combined with the excessive real estate and international development undertaken by the previous management team, have seriously affected Orpea's financial situation.”

“All the elements relating to these acts have been and will continue to be brought to the attention of the Public Prosecutor, further to the complaint already filed by the Company in April 2022, and in a nominative manner when appropriate,” he added.

The source close to the company said that any criminal investigation into the company may take up to three years but this will not interfere with the debt restructuring. They added that any hypothetical compensation that the business may have to pay will be provisioned as a legal liability as usual.

On 29 July 2022, the government body in charge of social policy for support of older people,  the Caisse Nationale de Solidarité pour l’Autonomie (CNSA) ordered Orpea to return €55.8m of government funding.

In response Orpea said it would reimburse any public grants that had not been appropriately requested, paid or used.

The order came after an investigation was carried out into the group’s operations. The final report came out on 26 March 2022, after which the Minister Delegate to the Minister of Solidarity and Health in charge of Autonomy decided to transmit it to the public prosecutor.

Following the publication of the book Les Fossoyeurs by journalist Victor Castanet, and in order to shed full light on the practices and dysfunctions denounced therein, the Government entrusted the General Inspectorate of Social Affairs (IGAS) and the General Inspectorate for Finance (IGF), on 1 February 2022, with a double administrative inquiry covering the entire Orpea group. The IGAS and the IGF carried out a six week in-depth examination of the group's practices and operations.

In June, Alvarez & Marsal and Grant Thornton released their own independent investigation into claims of abuse at Orpea. The consulting firms found evidence that Orpea committed financial wrongdoing but did not find proof of widespread abuse of patients.

In response, the company admitted that it did receive a surplus of allocations from the government which “may have contributed to the group’s results.”

Securities moves

The group’s €400m 2.625% 2025 dropped around 18 points and its €500m 2% 2028 bonds dropped 17 points on 26 October on the back of the second conciliation announcement, according to 9fin’s data. On Monday both notes are quoted at 27-mid, as shown below:

The group’s share price on the Euronext Paris has dropped 45% from €14.63 on 21 October 2022 to €8 at market open on 26 October after which it rallied to €9.61, as shown below. It has since fallen further to €7.98 today.