Structural features
Structural features are focused on addressing two
main concerns: (1) whether a healthy obligated
group’s assets may be subject to substantive consol-
idation in bankruptcy in the event of insolvency of
the parent or non-obligated entities; and (2)
whether the parent may have the ability to cause
the subsidiary to file itself into bankruptcy.
Moreover, the structure of a “ring-fenced” sub-
sidiary should have mechanisms in place restricting
the ability of the parent to siphon off assets or bur-
den the subsidiary with liabilities. In structured
finance, these concerns are partially addressed
through the use of a special purpose entity (SPE)
subsidiary. It is conceivable that some of these fea-
tures can be applied to senior living 501©(3) organ-
izations, including:
■The incorporation of each obligated group facil-
ity into a separate 501©(3), special purpose
operating entity (SPOE). A special purpose
operating entity is not a bankruptcy remote
entity, as that term is traditionally used in struc-
tured finance transactions, although it does
share some characteristics);
■The creation of a duty of the board of direc-
tors of the special purpose operating entity
towards the residents of the senior living facili-
ty in question (this should be consistent with
the charitable purposes for which the 501©(3)
was established);
■Provision of a non-consolidation opinion
between the parent and the special purpose oper-
ating entity, where appropriate;
■“Independent director” on each SPOE board,
unrelated to or affiliated with the parent whose
vote is required to file the facility into bankrupt-
cy and to approve contracts, notes or other obli-
gations with the parent.
Covenants
Covenants are often offered as a means to justify
ratings separation, particularly protective covenants
(designed to limit transfers of assets) and the nonpe-
tition covenant (in which the parent undertakes not
to file the subsidiary into bankruptcy). Standard &
Poor’s view is that in and of themselves, covenants
do not sufficiently insulate a subsidiary from its par-
ent, but a tightly drafted covenant package is
desired, including but not limited to:
■Negative pledges.
■Nonpetition covenant.
■Restrictions on asset transfer and inter-company
advances.
Collateral
If debt issued by the senior living obligated group
debt is fully secured by a pledge of all or substan-
tially all of the assets of the obligated group facili-
ties, such pledge should reduce the parent’s
incentive to attempt to cause the obligated group to
voluntarily file itself into bankruptcy. Such a securi-
ty pledge could include:
■A gross revenue pledge and a general pledge of
assets, including mortgages;
■The parent’s pledge of any interest in the subsidiary;
■All pledges must be perfected; and
■In addition, all non-recourse debt must be simi-
larly secured.
For a complete description of Standard & Poor’s
‘ring-fencing’ criteria, please see, “Ring-Fencing A
Subsidiary”, RatingsDirect, Oct. 19, 1999.■Physician Groups and Faculty Practice Plans ....................................................................
http://www.standardandpoors.com 169H
ealth care industry changes, including reim-
bursement reforms at the state and national
levels during the past 15 years, have helped develop
and expand more cost-effective outpatient treat-
ments. At the same time, limitations on physicians’
income and the emergence of large hospital-based
outpatient departments have increased physician
group competition with hospitals by bringing busi-
ness into physician-owned outpatient settings that
traditionally have been performed at hospitals.
Ambulatory surgery and radiology procedures are
two good examples that are often offered by well-
organized, well-capitalized multi-specialty group
practices, and typically at a lower price than hospi-
tals. These physician groups occasionally need
access to capital to build facilities and purchase
equipment that will allow them to provide cost-
effective health care services.