YesCare Bankruptcy

Welcome to the forty-seventh Pari Passu newsletter.

Today, we are going to learn about a currently contested topic in the restructuring world as of today. We will dive deep into YesCare and its unique Texas Two Step restructuring, which is causing a lot of controversy.

Background

The case of YesCare, Corizon, or Prison Health Services (yes, there were three names for this company) goes back for decades. The company was the foremost healthcare provider in U.S. prisons, with over four decades of industry experience and many years of success. However, the company was the subject of substantial liabilities, including debt obligations from previous leveraged buyouts and litigation against the company. 

Going into the company's leveraged buyout, YesCare has been owned by private equity companies for over a decade. In 2007, the company was taken private by Beecken Petty O'Keefe & Company (BPOC) and held until 2017. Then, in 2017, Blue Mountain Capital became the largest shareholder in the company, followed by another sizable private investor taking a stake in the company in 2020. As you can imagine, the first leveraged buyout added substantial debt to the company, and the subsequent private equity investors entering the company did not help YesCare's situation [1].

Degrading Financial Performance

While private equity investors were part of YesCare's problems, it is not the sole cause. YesCare's deteriorating situation was caused by its lack of revenue. The company generated revenue primarily from its contracts with prisons and jails nationwide. YesCare's contracts worked as such: YesCare partnered with prisons and jails for their correctional healthcare facilities. These facilities were provided on a multi-year basis, and the cash was paid upfront. A great working capital structure. This was good for YesCare, as it immediately provided them with liquidity to fund future growth into new prison facilities. However, the issue with many of these contracts was that they contained built-in clauses allowing the prisons to cancel their contracts midway through the term exposing YesCare to substantial risk.

In 2011, the company had 400 facilities, but in 2020, that number declined to just over 200. Furthermore, YesCare's contracts were by no means a form of security. In 2014, YesCare signed a five-year contract with Florida, which would have provided $229mm per year. However, in 2015, this contract ended early. Florida is one of many states where YesCare lost contracts, including Pennsylvania, Tennessee, and Minnesota [1].

The degrading financial performance of YesCare goes beyond poor top-line performance. The company suffered from mass amounts of litigation claims. From 2011 to 2021, the company suffered more than 1,000 lawsuits alleging 'substandard' care. This number does not even include the cases that were settled during this period, which would total an additional 2,000 claims and $29.3mm in litigation settlements. 

The combination of all these issues caused the continued downgrading of the company's credit score by Moody’s, culminating with the distressed rating in 2016.

Corporate History 

Below is a timeline of the company's major events, from incorporation to where we are today [2].

1979: Prison Health Services was established, based in Delaware. PHS was the largest competitor in the correctional healthcare industry up until their merger in 2011.

1979-2011: Prison Health Services’ growth strategy was primarily inorganic, fueled by numerous acquisitions. During this time, the merged companies formed to create PHS Correctional Healthcare.

2011: To continue its growth and become the market leader in the prison healthcare space, PHS merged with Correctional Medical Services, a provider of quality healthcare and administration to U.S. correctional facilities. This merger created the company known as Corizon.

2016: In 2016, litigation claims started to pile on the company. From 2016 to 2011, over 600 litigation claims piled up on the company regarding poor care services to their partnered correctional facilities.

2019: Corizon enters financial trouble, losing $350mm in contracts with Arizona and New York City prisons.

2021: Restructuring professional Sara Tirschwell was named CEO. She aimed to solve the mounting claims against the company for corporate misconduct and declining financial operations.

2022: Corizon moved from Delaware to Texas, laying the groundwork for a Texas Two Step.

2022: To assist in the turnaround, Corizon underwent a company split. The two new entities were YesCare and Tehum. In this split, YesCare was structured to be the forward-looking operating entity, as substantially all of the liabilities of Corizon were handed to Tehum (this is the Texas Two Step that will be elaborated on later).

February 2023: Tehum files for bankruptcy.

Texas Two-Step Review

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