Orpea debt disaster a cautionary story for the overambitious

Nursing house group Orpea was lengthy a inventory market darling whose income grew because it expanded in its house market of France and abroad. Behind its success was its trusted model — households noticed its amenities as a secure place to ship their aged dad and mom to dwell.

Journalist Victor Castanet put paid to all that in January when he printed a bombshell e-book known as The Gravediggers that documented mistreatment of residents at Orpea amenities and alleged a number of forms of monetary fraud have been practised by the group.

In France, the place a piece of Orpea’s income comes from state subsidies for care of the aged, Castanet additionally uncovered how the group cultivated shut ties with politicians and regulators and alleged this enabled it to keep away from oversight.

The fallout was quick: Orpea shares fell by greater than half following publication, whereas these of unrelated French rival Korian fell by 1 / 4, erasing nearly €4bn in market worth.

However the story didn’t finish there. The e-book catalysed a debt disaster that now threatens the group’s survival. Orpea has turn into a cautionary story for firms that expanded too aggressively when cash was low-cost and are actually unable to deal with their heavy money owed as rates of interest rise and the financial outlook dims.

For the second time this 12 months, Orpea in late October entered a court-protected course of to restructure its €9.5bn debt pile by negotiating with its collectors. An earlier court-supervised plan finalised in June to boost extra debt from its banks and dump actual property belongings to pay down debt proved too little, too late, forcing Orpea to take rather more radical steps to chop its leverage that now stands at 25 occasions internet debt-to-ebitda.

Orpea unveiled a restructuring plan final week that features a debt-to-equity swap value about €3.8bn that’s more likely to wipe out shareholders and a capital improve of no less than €1.3bn however ideally round €2bn from new or current buyers. The fairness worth of Orpea has shrivelled to beneath €500mn, a mirrored image of the approaching “unparalleled dilution” that may multiply the share depend by greater than 15 occasions, in line with analysts at Alphavalue.

What started with an exposé of how meals and grownup nappies have been being rationed to the detriment of aged residents in Orpea’s amenities has mutated right into a story of extreme risk-taking, poor company governance, and aggressive accounting practices. “Orpea was a home of playing cards so when the wind began blowing it couldn’t resist,” says one individual near the restructuring.

There are dozens of authorized investigations now beneath solution to decide if the care of residents was negligent and in addition whether or not any executives could have dedicated fraud, embezzlement of public funds and insider buying and selling.

Orpea says it’s absolutely co-operating with investigators and regulators, and has removed 30 prime executives, changed the chief government and named a brand new chair and administrators.

Castanet, who spent three years investigating his e-book, says the scandal was a failure of governance in any respect ranges. “Orpea has turn into a byword for out-of-control capitalism in France,” he informed the Monetary Instances.

Whereas the Orpea case could also be a dramatic outlier, it additionally holds classes for what’s to return. Attorneys and bankers in Paris predict a wave of debt restructurings because the protecting impact of pandemic assist fades and corporations’ money era worsens due to ballooning vitality prices and decrease demand.

The strains can already be seen. Chapter filings have been up 41 per cent to round 38,500 previously 12 months by means of to the top of October, in line with figures from Insee, the French statistics company, though they continue to be about 25 per cent decrease than pre-pandemic.

A battalion of legal professionals is lining as much as attempt to defend their shoppers’ pursuits within the Orpea debt restructuring negotiations which can be anticipated to go on till January.

This is without doubt one of the first large circumstances to undergo new chapter guidelines that got here into impact in 2021 when France transposed a 2019 EU directive aimed toward harmonising practices throughout member states and inspiring early, preventive restructurings.

Consultants say the brand new guidelines deliver France extra into line with the US and UK method to chapter proceedings, notably by scrapping the previous system by which shareholders loved veto energy over some restructurings, even when the corporate’s fairness had little worth.

It’s a far cry from the times when Orpea set the usual for nursing houses in France. As a substitute the group is now creating case legislation that can information the way in which courts deal with closely indebted firms sooner or later.

leila.abboud@ft.com