The financing gives much needed breathing space, given a €1.755bn maturity wall later this year. However the care home provider could need to do more to de-lever and stabilize its balance sheet, with further significant maturities in 2023-2025. In total, the group has €8.87bn of gross debt and a real estate portfolio valued at just €8.179bn.

The financing agreement, sanctioned by the Nanterre Commercial Court last Friday (under the conciliation procedure) is subject to certain events of default. Interestingly a default could be triggered by “administrative, arbitral, governmental or regulatory disputes that would reasonably be expected to have a material adverse effect or impact the commitments relating to the disposal of operating and real assets.” It is worth pointing out that Orpea is being investigated by government authorities on a number of criminal and fraud claims.

The €1.73bn of new money will be made available incrementally until Dec 31 2022 and is subject to a number of conditions precedent, with a first drawdown of €250m due in mid-June. Pricing on the new facilities, however is significantly higher than those which its replaces., with a large portion due within 18-months.

The key terms are summarised below:

Source: Orpea announcement

The company is more vague about the status and the providers of the planned €1.5bn elevation facility - also designated as C1 and C2 loans.

In its statement the company says: “ORPEA has undertaken to enter into discussions with all third party creditors with a view to seeking their support for the Group's financing plan, and in particular their participation in the provision of the C Loans.”

It adds, similar to the Class A and Class B loans, the C loans “in the event of the syndication of C Loans to third party creditors who are participating solely in C Loans, such creditors will benefit as second- ranking creditors under the Dailly assignment and will benefit from a second ranking pledge on (i) 100% of the shares of CEECSH and (ii) 100% of the shares of ORESC.”

Patient notes

The care home provider has attracted widespread attention from distressed funds, politicians, the press and now the police as it struggles to stay in good health.

CEO Yves Le Masne was dismissed earlier this year following allegations of patient abuse by the company detailed in Victor Castanet book Les Fossoyeurs (The Gravediggers). In late March, the French government filed a criminal complaint against Orpea over allegations of patient abuse and a ‘media furore’ dented its reputation.

It didn’t take long for more ailments to emerge, with allegations of fraud levelled against its managers by Investigate Europe on 18 May. The allegations centred on Lipany a Luxembourg HoldCo which had 40 subsidiaries related to a number of property transactions. Orpea’s 2% 2028 bonds dropped almost 20-points on the news into the 60s.

Last Tuesday (7 June), 300 gendarmes entered Orpea’s corporate HQ and 20 other company properties and former CEO Yves Le Masne was questioned by French authorities last Tuesday over alleged insider trading.

Advisory firms Alvarez & Marsal and Grant Thornton last week released their 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.”

A spokesperson for Orpea told 9fin that the police had carried out the search under orders of the French government who filed a criminal complaint against Orpea over allegations of patient abuse at the end of April.

Death by debt

In an earnings call last month, management said the proposed new financing is the first stage of its financial strategy overhaul and it enables new lines of financing to be secured. As part of its financial roadmap, Orpea intends to complete more than €3bn worth of disposals by the end of 2025.

One of Orpea’s main targets is to reduce leverage and debt obligations. Under its covenant obligations, the group must keep its adjusted leverage under 5.5x. The company’s current adjusted leverage stands at 3.6x defined as net financial liabilities - real estate debt/(EBITDA - (6% x real estate debt). Restated gearing defined as net financial debt / (equity + quasi equity) is 1.7x compared to 2x test.

As part of the conciliation agreement, Orpea has committed to dispose of real estate assets for an aggregate gross asset value of €1bn by 31 December 2023, rising to €1.5bn by 31 December 2024 and increasing to EUR 2bn by 31 December 2025. It also agreed to allocate net proceeds from the disposal of real estate assets towards repayment of the €1.73bn new facility.

The group’s real estate portfolio currently has an estimated value of around €8bn. A buysider raised concerns over Orpea’s ability to complete more than €3bn worth of disposals, as Orpea’s has historically been slow at selling real estate, with just €500m sold to date.

Bad press creates stress

Despite the bad press, Orpea has produced buoyant results in the past few quarters (which we know now may include some mysterious “surplus allocations”), however its debt price has been falling and falling as each scandal emerges. Orpea is still yet to release its FY’21 audited accounts so further shocks may materialise.

The company’s €500m SUNs have dropped from a comfortable par in the pre-scandal days of January to current levels of the mid-50s. The bonds pay 2% and mature in 2028.

Distressed funds are yet to sink their teeth into the debt pile but are monitoring this situation closely as the price continues to tumble and incumbent lenders reconsider their positions in light of the mounting ESG concerns.

According to one distressed trader it is still a waiting game with little trading activity so far; some funds have bought into the convertible bonds and others are sniffing around the Schuldschein debt which matures next year. A second trader noted that the Schuldschein could be attractive given their low pricing at around 60, however he added that there has never been a restructuring in France involving Schuldschein, adding this could dissuade potential investors.

While pricing remains low, it is unclear how valuable the debt is.

One buysider said Orpea was almost un-investable due to the ongoing ESG concerns and uncertainty surrounding the French government’s criminal complaint, however another said it could be a good investment given the underlying value of Orpea’s assets, strong market position and good handling of the litigation proceedings. He added that the new CEO appointment could allow Orpea to turn over a new leaf and move away from its darker past.

Distressed investors are also eyeing Orpea’s competitor Korian which is also facing allegations of patient abuse. Shares in Korian have slumped as it faces legal action by family members of residents over the way it managed its homes. Korian has denied any widespread wrongdoing and said it would always co-operate with authorities. Previously investment grade, its bonds have since traded into the mid-70s, to yield 7-8%.

Despite the recent scandals, a number of market participants told 9fin they believe the care home sector continues to be attractive given the ageing population in Europe and increasing demand for services.

As one senior lawyer bluntly summarised last week: “the only deals I’ve done this year have all involved beds, sheds and deads” (roughly translating as student accommodation, warehouses and care homes).