Private equity firms extract another $100 million in dividends from CHG Healthcare Services

In August 2023, CHG Healthcare Services, a medical staffing company, implemented a $530 dividend recapitalization.[1] This is the company’s sixth dividend recapitalization[2] since it was acquired by private equity firms Leonard Green and Partners and Ares Management in 2012,[3] bringing the total tally of debt-funded dividends the firms have reaped from the staffing company to at least $1.6 billion.

Summary of CHG’s Dividend Recapitalizations since 2012

A dividend recapitalization is a transaction by which private equity firms add debt to their portfolio companies’ balance sheets in order to collect dividends for themselves. These transactions often benefit private equity owners at the expense of the companies, their patients, their employees, and the communities they serve.[10]

Leonard Green has a history of using debt-funded dividends to raid healthcare companies it owns, often to the detriment of the companies.[11][12] Most notably, Leonard Green extracted at least $645 million from safety net hospital chain Prospect Medical Holdings. It has since exited its investment in Prospect, but its pillaging has left many of Prospect’s hospitals in dire financial straits.[13][14]

According to credit rating agency Moody’s Investor Service, CHG’s August 2023 dividend recapitalization raised an additional $530 million in debt, most of which was used to replace a first lien term loan with a new one as well as pay $100 million in dividends to its private equity owners.[15]

Prior to August 2023, CHG’s most recent dividend recapitalization had occurred in September 2021. Its private equity owners paid themselves a $560 million dividend, $260 million of which was funded with new debt, leading to a credit downgrade from Moody’s.[16] This transaction came on the heels of a travel nursing frenzy in which government relief funds for the COVID-19 pandemic made it possible for hospitals to pay steeply inflated travel nursing rates. Opportunistic private equity firms joined the frenzy, and 2021 saw the highest number of private equity deals in the medical staffing space. Beginning in late 2021, the hospital industry and nearly 200 legislators called for a federal investigation of the healthcare staffing industry for potential price gouging and price collusion.[17]

At the same time that many of these staffing companies were collecting subsidies intended to support struggling healthcare providers weather the pandemic, their PE owners were piling on debt to enrich themselves. As PESP reported in October 2020 and March 2021, multiple private equity firms executed dividend recapitalizations during the pandemic at healthcare companies that had received government COVID-relief funds and loans, such as CARES Act funds.[18][19] As reported by WSJ, 2020 and 2021 would become record setting years for all sectors, in which U.S. companies borrowed almost $177 billion for dividend transactions. However, for many companies these debt-funded payouts have resulted in credit downgrades and financial stress.[20]

Due to rising interest rates, dividend recapitalizations slowed down substantially in 2022 into 2023.[21] But in late 2023, it appears private equity firms are ramping up these transactions yet again, although still at levels far below those seen in 2020 and 2021. WSJsuggests this changing trend is due to a need to generate profits during a slump in which it is difficult for private equity firms to sell assets.[22]

Private equity-owned companies are facing a disproportionate amount of credit downgrades[23] due to their high amounts of debt generated through leveraged buyouts, dividend recapitalizations and other types of debt transactions. Multiple private equity-owned healthcare companies in recent months have even needed to file for bankruptcy as they struggle under the weight of their debt. In May, KKR-owned Envision Healthcare filed for Chapter 11 bankruptcy;[24] in June, Blackstone-owned Center for Autism and Related Disorders filed for Chapter 11 bankruptcy;[25] and in July, American Physician Partners, backed by Brown Brothers Harriman Capital, announced it would close its business.[26]

Of the 34 healthcare companies that Moody’s listed as facing credit downgrades and risk for default as of December 2022, close to 90 percent were owned by private equity firms.[27]

Despite the over $1.6 billion in dividends that Leonard Green and other investors have extracted from CHG since 2012, the company remains in a relatively stable position for the time being. While Moody’s did not downgrade CHG itself following the August dividend recapitalization, it did downgrade its first lien term loan and revolving credit facility. In its rating action, Moody’s acknowledged the high demand for CHG’s staffing services, but also acknowledged the company’s “governance risk considerations” which “involve the company’s aggressive financial policy and risk management and concentrated decision making under private equity ownership.”[28]

[1] Moody’s Investors Service. “Moody’s Affirms CHG Healthcare’s B2 CFR and Downgrades First Lien Term Loan Rating to B2, Outlook Stable | Rating Action | Moody’s,” August 14, 2023. https://www.moodys.com/research/Moodys-affirms-CHG-Healthcares-B2-CFR-and-downgrades-first-lien-Rating-Action–PR_479368?cy=arg&lang=es-ar.

[2] “PitchBook Profile – CHG Healthcare.” Accessed September 28, 2023. https://my.pitchbook.com/profile/10513-54/company/deals.

[3]Reuters. “Leonard Green, Ares Snap up CHG Healthcare.” October 22, 2012, sec. Financials. https://www.reuters.com/article/chg-healthcare-idINL1E8LMNJI20121022.

[4] Moody’s Investors Service. “Moody’s Affirms CHG Healthcare’s B2 CFR and Downgrades First Lien Term Loan Rating to B2, Outlook Stable | Rating Action | Moody’s,” August 14, 2023. https://www.moodys.com/research/Moodys-affirms-CHG-Healthcares-B2-CFR-and-downgrades-first-lien-Rating-Action–PR_479368?cy=arg&lang=es-ar.

[5] Moodys.com. “Moody’s Affirms CHG Healthcare’s B2 CFR, Assigns B1 Rating to New First Lien Debt; Outlook Changed to Negative from Stable,” September 13, 2021. http://www.moodys.com:18000/research/Moodys-affirms-CHG-Healthcares-B2-CFR-assigns-B1-rating-to–PR_453831.

[6] Moody’s Investors Service. “Moody’s Affirms CHG Healthcare’s B2 CFR and B1 First Lien Term Loan Rating Following Debt Funded Dividend | Rating Action | Moody’s,” November 17, 2016. https://www.moodys.com/research/Moodys-affirms-CHG-Healthcares-B2-CFR-and-B1-First-Lien-Rating-Action–PR_358297.

[7]WSJ Pro – Private Equity. “CHG Healthcare to Pay $525M to Leonard Green and Ares.” May 20, 2016. https://www.wsj.com/articles/chg-healthcare-to-pay-525m-to-leonard-green-and-ares-1463773859.

[8] S&P Global. “Another Dividend: CHG Healthcare Readies $990M Leveraged Loan Backing Recap,” May 16, 2023. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/leveraged-loan-news/another-dividend-chg-healthcare-readies-990m-leveraged-loan-backing-recap.

[9] Moody’s Investors Service. “Moody’s Affirms CHG Healthcare’s B2 CFR; Rates Proposed Add-on Term Loans | Rating Action,” June 21, 2013. https://www.moodys.com/research/Moodys-affirms-CHG-Healthcares-B2-CFR-rates-proposed-add-on-term-Rating-Action–PR_276318.

[10] O’Grady, Eileen. “Dividend Recapitalizations in Healthcare: How Private Equity Raids Critical Health Care Infrastructure for Short Term Profit.” Private Equity Stakeholder Project. Accessed September 28, 2023. https://pestakeholder.org/wp-content/uploads/2020/10/PESP-HC-dividends-10-2020.pdf.

[11] O’Grady, Eileen. “Leonard Green & Partners Reaps Repeated Payouts from Health Care Companies – Private Equity Stakeholder Project PESP.” Private Equity Stakeholder Project (blog), April 14, 2020. https://pestakeholder.org/news/leonard-green-partners-reaps-repeated-payouts-from-health-care-companies-2/.

[12] O’Grady, Eileen. “Dividend Recapitalizations in Healthcare: How Private Equity Raids Critical Health Care Infrastructure for Short Term Profit.” Private Equity Stakeholder Project. Accessed September 28, 2023. https://pestakeholder.org/wp-content/uploads/2020/10/PESP-HC-dividends-10-2020.pdf.

[13] O’Grady, Eileen. “How Private Equity Raided Safety Net Hospitals and Left Communities Holding the Bag: A Case Study on Leonard Green & Partners’ Owernship of Prospect Medical Holdings.” Private Equity Stakeholder Project, November 2022. https://pestakeholder.org/wp-content/uploads/2022/11/Prospect_Primer_Nov-2022.pdf.

[14] Altimari, Dave, Jenna Carlesso, and Mark Pazniokas. “Owners of Waterbury, Manchester and Rockville Hospitals to Lawmakers: Financial Situation Is ‘Dire.’” CT Mirror, September 26, 2023. https://ctmirror.org/2023/09/26/hospital-execs-to-lamont-lawmakers-seal-the-yale-prospect-deal/#:~:text=The%20presidents%20of%20two%20Connecticut,not%20approved%2C%20the%20facilities%20may.

[15] Moody’s Investors Service. “Moody’s Affirms CHG Healthcare’s B2 CFR and Downgrades First Lien Term Loan Rating to B2, Outlook Stable | Rating Action | Moody’s,” August 14, 2023. https://www.moodys.com/research/Moodys-affirms-CHG-Healthcares-B2-CFR-and-downgrades-first-lien-Rating-Action–PR_479368?cy=arg&lang=es-ar.

[16] Moody’s Investors Service. “Moody’s Affirms CHG Healthcare’s B2 CFR, Assigns B1 Rating to New First Lien Debt; Outlook Changed to Negative from Stable,” September 13, 2021. https://www.moodys.com/research/Moodys-affirms-CHG-Healthcares-B2-CFR-assigns-B1-rating-to-Rating-Action–PR_453831?cy=arg&lang=es-ar

[17] Pgs. 18-19 of Bugbee, Mary. “Profiting in Crisis: Exploring Private Equity’s Investments in Travel Nursing Amidst a Critical Nursing Shortage and a Pandemic.” Private Equity Stakeholder Project, September 2022. https://pestakeholder.org/wp-content/uploads/2022/10/PE_travelnursing_FINAL-1.pdf.

[18] O’Grady, Eileen. “Dividend Recapitalizations in Healthcare: How Private Equity Raids Critical Health Care Infrastructure for Short Term Profit.” Private Equity Stakeholder Project. Accessed September 28, 2023. https://pestakeholder.org/wp-content/uploads/2020/10/PESP-HC-dividends-10-2020.pdf.

[19] O’Grady, Eileen. “Private Equity Has Already Reaped Hundreds of Millions of Dollars of Debt-Funded Dividends from Health Care Companies in 2021.” Private Equity Stakeholder Project (blog), March 24, 2021. https://pestakeholder.org/news/private-equity-has-already-reaped-hundreds-of-millions-of-dollars-of-debt-funded-dividends-from-health-care-companies-in-2021-2/.

[20] Cumming, Chris. “For Some Companies, Debt Downgrades Followed Payouts to Private-Equity Owners.” Wall Street Journal, June 11, 2023, sec. WSJ Pro. https://www.wsj.com/articles/for-some-companies-debt-downgrades-followed-payouts-to-private-equity-owners-e9cde86.

[21] Cumming, Chris. “For Some Companies, Debt Downgrades Followed Payouts to Private-Equity Owners.” Wall Street Journal, June 11, 2023, sec. WSJ Pro. https://www.wsj.com/articles/for-some-companies-debt-downgrades-followed-payouts-to-private-equity-owners-e9cde86.

[22] Cumming, Chris. “Private Equity Firms Return—Tentatively—to Debt-Fueled Payouts.” Wall Street Journal, August 18, 2023, sec. WSJ Pro. https://www.wsj.com/articles/private-equity-firms-returntentativelyto-debt-fueled-payouts-e1b1f61d.

[23] Cumming, Chris. “For Some Companies, Debt Downgrades Followed Payouts to Private-Equity Owners.” Wall Street Journal, June 11, 2023, sec. WSJ Pro. https://www.wsj.com/articles/for-some-companies-debt-downgrades-followed-payouts-to-private-equity-owners-e9cde86.

[24] Bugbee. “It Should Come as No Surprise That KKR-Owned Envision Healthcare Has Finally Declared Bankruptcy.” Private Equity Stakeholder Project (blog), June 6, 2023. https://pestakeholder.org/news/it-should-come-as-no-surprise-that-kkr-owned-envision-healthcare-has-finally-declared-bankruptcy/.

[25] O’Grady, Eileen. “PE’s Failed Autism Failed Bets Harm Workers and Consumers.” Private Equity Stakeholder Project (blog), July 28, 2023. https://pestakeholder.org/news/pes-failed-autism-failed-bets-harm-workers-and-consumers/.

[26] Gamble, Molly. “American Physician Partners to Close.” Becker’s ASC Review, July 18, 2023. https://www.beckershospitalreview.com/hospital-physician-relationships/american-physician-partners-to-close.html.

[27] O’Grady, Eileen. “Almost 90% of Most Distressed Healthcare Companies Are Owned by PE Firms.” Private Equity Stakeholder Project (blog), January 3, 2023. https://pestakeholder.org/news/almost-90-of-most-distressed-healthcare-companies-are-owned-by-pe-firms/.

[28] Moody’s Investors Service. “Moody’s Affirms CHG Healthcare’s B2 CFR and Downgrades First Lien Term Loan Rating to B2, Outlook Stable | Rating Action | Moody’s,” August 14, 2023. https://www.moodys.com/research/Moodys-affirms-CHG-Healthcares-B2-CFR-and-downgrades-first-lien-Rating-Action–PR_479368?cy=arg&lang=es-ar.