Though lenders and landlords may be willing to renegotiate terms, communication is key, the lawyers suggest

COVID-19 has vastly increased demand for clinical laboratory testing. But at many labs, the pandemic has caused much damage to the bottom line. Due to numerous factors—including reductions in elective procedures and increased operating costs—many independent lab companies have seen a 30% to 60% cut in revenue, says attorney Richard S. Cooper, JD, of McDonald Hopkins, a law firm that represents more than 350 medical laboratories across the US.

“Some of that was offset where clinical laboratory companies took on COVID testing. But in our experience, it was a partial offset at best,” he said in an exclusive interview with Dark Daily. Cooper is co-chair of the firm’s National Healthcare Practice Group.

To address these challenges, the firm has advised lab companies to take a hard look at their:

  • operations,
  • market conditions,
  • supplier relationships,
  • lender agreements, and
  • other elements of their businesses.

Lab executives, he says, should consider steps to reduce expenses or increase revenues, such as increasing prices if conditions permit. In extreme cases, medical laboratories may have to consider:

  • Chapter 11 bankruptcy,
  • Consensual out-of-court restructuring, or
  • Buyouts.
“I think lenders have been willing to work with borrowers, but I don’t think this has been a ‘get out of jail free’ card,” Richard S. Cooper, JD (above), co-chair of the National Healthcare Practice Group at McDonald Hopkins, told Dark Daily. “Lenders are going to look at borrowers that were struggling before the whole COVID-19 situation with a more critical eye. Lenders seem to be more willing to work with borrowers that were doing well, but then were hit with a temporary hiccup.” (Photo copyright: McDonald Hopkins.)

Cooper, and colleague Jason M. Smith, JD, elaborated on these points during the interview. Smith is chair of the Commercial Finance Group. “The vast majority of my work is representing either lenders or borrowers in credit relationships,” Smith explained.

Dealing with Lenders

For many lab companies facing financial distress, the most important action, the lawyers suggest, may be to review loan or credit agreements and get a better understanding of the lab’s obligations. Then, the lab can approach lenders for potential relief, such as deferred payments or temporary adjustments to reporting requirements.

Either way, “communication is key,” Smith said, adding that labs should first “come up with projections and cashflow analyses and figure out which of those requirements they are not going to be able to meet.”

Then, Smith added, labs should reach out proactively. “Lenders generally don’t like surprises,” he said. “They’re going to be a lot more willing to work with you when they find out about any issues directly from you, as opposed to after receiving financial statements and discovering the issues for themselves.”

Ultimately, clinical lab companies may be able to negotiate better terms, not only with financial institutions, but also with landlords, Cooper said. For example, labs may ask for rent abatement or payment deferrals. These steps “may reduce or eliminate the need to cut back on staff,” Cooper said, “which may be less disruptive of operations.”

When dealing with lenders, Cooper advises against a “Let’s throw everything at the wall and see what sticks” approach. Instead, labs should try “concrete, smaller lists of things that are really important. That’s the best way to come up with a reasonable ask for your lenders and have them take you seriously.”

When to Call Your Lawyer

Cooper says lawyers can play two different roles in these negotiations. “It’s important that lab executives discuss with their lawyers any potential violations of lease and lending documents, what the obligations are, and what the potential legal impact may be.” He added, “Labs should engage and discuss with a lawyer who’s experienced in those areas to understand how lenders and financial institutions might be willing to accommodate the lab’s financial situation by suspending or temporarily modifying the terms of those documents.”

Jason M. Smith, JD (above), chair of the Commercial Finance Group at McDonald Hopkins, told Dark Daily, “Clinical laboratory companies could approach their lender and/or landlord directly. You don’t necessarily need a lawyer to do that. On the other hand, a lot of clients prefer that their lawyer at least participate in any dialogue with the landlord and lender. But it’s not absolutely necessary. So, the lawyer can be an information resource or an active participant in negotiating.” (Photo copyright: McDonald Hopkins.)

The Bankruptcy Option

Clinical laboratory companies that are in serious financial trouble may have to consider drastic measures, such as bankruptcy. In a Chapter 11 bankruptcy, Cooper explains, you can continue to operate under supervision of the court while restructuring the business and renegotiating terms with lenders. But “there’s always a stigma attached to any kind of restructuring filing,” he said. “It’s public and it can raise questions among your suppliers and customers as to whether you’re sustainable. So, it would be more of a last measure.”

A more preferable course, he says, may be to negotiate a consensual out-of-court workout in which creditors agree to extend repayment terms or reduce debt.

A Good Time for Buyouts?

Another option for distressed lab companies may be buyouts. “We are starting to see a pickup in [merger and acquisition] activity,” Cooper says. “Some of it is normal activity not necessarily driven by financial distress. There’s a company that’s attractive in the marketplace and buyers are interested in that laboratory.”

In other situations, he noted, clinical laboratories might not feel compelled to sell, but “they want to become part of a larger platform with better capital resources to help them withstand the COVID-19 scenario and future market-altering events.”

Cooper continued, “there are other labs that basically say, ‘We’re not going to make it on our own. We need to find a buyer. We need to find capital.’ And then, of course, there are buyers that see market opportunities in labs which are available for acquisition that otherwise might not have been, and perhaps on more favorable terms.”

Some labs, he says, may wait for their revenues to recover, so they can “go to market in a stronger position.” But, “there clearly will be some labs out there that will be available, and available at a lower price than they would have been pre-COVID.”

Regardless of which path a financially-distressed clinical lab company chooses to take as a way to resolve the situation, it is best to take the initiative to consult with experienced attorneys, CPAs, and other advisors while there is still time to negotiate different solutions with lenders, landlords, mortgage companies, and others.

—Stephen Beale

Related Information:

Streaming Webinar | How to Maximize your Laboratory’s Valuation When Preparing for a Sale: Key Steps from a Business and Legal Perspective