DEF: ModivCare Seeks Stockholder Approval for $30 Million Second Lien Note Purchase and Debt Exchange

ModivCare is holding a special stockholder meeting to approve a transaction involving the issuance of $30 million in new second lien notes and the exchange of $20.165 million of existing senior notes for new second lien notes with Coliseum Capital.

Summary

• ModivCare is seeking stockholder approval for a transaction with Coliseum Capital Partners and Blackwell Partners, referred to as the Coliseum Transactions.
• The transaction involves the purchase of $30 million in new second lien notes by the investors and the exchange of $20.165 million of existing senior notes held by the investors for new second lien notes.
• The new second lien notes will have an interest rate of 5% if paid in cash or 10% if paid in kind and will mature in 2029.
• The transaction is subject to approval by a supermajority of stockholders, excluding shares held by Coliseum Capital, due to their status as an interested stockholder under Delaware law.
• The company is also seeking approval to adjourn the special meeting if necessary to solicit additional votes.
• The company has hired Alliance Advisors LLC to assist in proxy solicitation at an estimated cost of $20,000 plus expenses.

Sentiment

Score: 6

Explanation: The document is neutral in tone, presenting the facts of the proposed transaction. While the financing is positive, the need for a supermajority vote and the potential for alternative financing if the transaction fails introduces some uncertainty.

Positives

• The transaction provides ModivCare with $30 million in new capital.
• The transaction allows ModivCare to exchange existing debt for new debt with similar terms.
• The new financing is intended to strengthen the company's financial foundation and enhance operational performance.
• The company believes the transaction is in the best interest of the company and its stockholders.
• The company has secured the necessary consents from the majority of senior note holders to amend the indenture.

Negatives

• The transaction requires a supermajority vote of stockholders, excluding those held by Coliseum Capital, which may be difficult to achieve.
• The company will incur expenses of up to $150,000 for the investors' legal fees.
• The new second lien notes will be secured by the same collateral as the company's existing credit agreement, potentially diluting the value of existing debt.
• If the transaction is not approved, the company may need to explore other financing options that could be more expensive or dilutive to existing stockholders.

Risks

• Failure to obtain stockholder approval for the Coliseum Transactions would prevent the company from receiving the $30 million in new financing.
• If the transaction is not approved, the company may need to explore other financing options that may be dilutive to the company's common stock and/or more expensive.
• The company is subject to Section 203 of the Delaware General Corporation Law, which restricts business combinations with interested stockholders.
• The company's ability to issue additional secured debt is limited by the terms of the new second lien notes.
• There is no public market for the second lien notes, and there is no assurance that a public market will ever develop.

Future Outlook

The company intends to use the incremental financing to strengthen its financial foundation, enhance operational performance, and position itself for future sustainable growth. The company will need to explore other financing options if the transaction is not approved.

Management Comments

• The Incremental Financing is intended to strengthen the Company’s financial foundation, enhance operational performance and best position the Company for future sustainable growth.
• The Board believes that, in order to attempt to execute the Company’s business plan, it is important for the Company to have the ability to enter into the Coliseum Transactions in order to ensure it has sufficient liquidity and capital resources.

Industry Context

This transaction reflects a trend of companies seeking to bolster their balance sheets through debt financing and strategic partnerships. The involvement of Coliseum Capital, a known investor, suggests a level of confidence in ModivCare's future prospects. The need for a supermajority vote highlights the complexities of transactions involving significant shareholders.

Comparison to Industry Standards

• The use of second lien notes is a common financing tool for companies seeking capital, especially in situations where traditional bank debt is limited.
• The interest rate of 5% cash or 10% PIK is within the range of what is seen in the market for similar types of debt instruments, although the PIK option is more expensive.
• The requirement for a supermajority vote due to the involvement of an interested stockholder is a standard practice under Delaware law to protect minority shareholders.
• Companies like Encompass Health and LHC Group also utilize debt financing to fund operations and growth, but the specific terms and conditions vary based on their financial situations and market conditions.
• The exchange of existing debt for new debt is a common strategy for companies looking to manage their debt profile, similar to what companies like Tenet Healthcare have done in the past.

Related Party Transactions

• The Coliseum Transactions involve Coliseum Capital Partners and Blackwell Partners, which are related parties due to their ownership stake in ModivCare.

Stakeholder Impact

• Shareholders will be impacted by the vote on the Coliseum Transactions Proposal, which could affect the company's financial stability and future prospects.
• Creditors will be impacted by the issuance of new second lien notes, which will be secured by the same collateral as the company's existing credit agreement.
• Employees may be indirectly impacted by the company's financial stability and future growth plans.

Next Steps

• Stockholders will vote on the Coliseum Transactions Proposal and the Adjournment Proposal at the Special Meeting on March 3, 2025.
• The company will need to obtain the required 66-2/3% vote of outstanding shares, excluding those owned by Coliseum Stockholders, to approve the transaction.
• The company will need to finalize the Second Lien Notes Indenture and related documents.
• The company will need to complete the exchange of senior notes for second lien notes.

Key Dates

Keywords

ModivCare, Coliseum Capital, Second Lien Notes, Debt Exchange, Stockholder Vote, Financing, Delaware General Corporation Law, Proxy Statement, Senior Notes, Incremental Term Loan