Debtwire: Medical Equipment Loan-to-Own Deals Heat Up as Venture Capital Fades – Middle Market Memo – August 22, 2016

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Debtwire: Medical Equipment Loan-to-Own Deals Heat Up as Venture Capital Fades – Middle Market Memo – August 22, 2016

Written by Debtwire, the leading provider of real-time intelligence, analysis and data on distressed debt, leveraged finance and asset-backed markets.

Medical equipment loan-to-own deals heat up as venture capital fades – Middle Market Memo by Jon Berke August 22, 2016

Artificial heart manufacturer SynCardia Systems’ effort to go public in late 2015 was stymied by the all too common wild card of medical regulatory decrees.

The FDA released information in June 2015 suggesting a higher mortality rate among patients using the company’s equipment, and recommended surgeons and cardiologists consider that when making “device selections,” according to court filings. SynCardia issued a letter outlining what it saw as inaccuracies in the data. The FDA notice, which was eventually rescinded, first came out prior to SynCardia’s IPO road show and negatively impacted the company’s ability to tap the equity markets, said a source close to the situation.

With the IPO option off the table, the capital-constrained company wound up filing for bankruptcy on 5 July and accepted a credit bid with affiliates of Versa Capital who had acquired the company’s prepetition bank debt.

SynCardia’s story is now becoming the new normal for mid-cap medical equipment companies as the venture capital community has largely turned off the spigot for development, while bigger equipment companies are not prone to dealing with turnaround stories.

The end result is a smattering of companies dependent on turnaround funds and rescue capital in advance of a potential sale to a larger company down the road. And as evidenced by some recent deals, buyers have been willing to pay generous multiples for more mature companies. This includes last year’s hotly contested auction for wheelchair equipment manufacturer Sunrise Medical, which sold for roughly 10x-12x its EUR 50m EBITDA to Nordic Capital.

“These companies for years had been able to raise an unlimited amount of money from the public and private markets, but that trend has come to a halt and entities need to figure out how to change their business model, stop bleeding money and be able to convince potential investors why they will be the ones who will achieve profitability down the road – and sooner rather than a lot later”, said Peter Kaufman, president of New York-based financial restructuring firm Gordian Group, LLC.

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