Sun seeks bankruptcy protection.

Just five weeks after Vencor rocked the long term care industry by filing for federal bankruptcy protection, Sun Healthcare Group and its subsidiaries followed suit. The troubled nursing home chain, which filed under Chapter 11 in Wilmington, Delaware, reporting assets of $1.8 billion and debt totaling $2.1 billion, said it did so to "facilitate its efforts to restructure its capital and lease obligations."

In addition to operating 369 skilled nursing facilities, 34 assisted living facilities, 9 rehabilitation hospitals, Sun provides ancillary services to other providers. It also has 180 long term care facilities in Europe.

To ensure that the company has the short-term working capital necessary to operate its business, Sun obtained a commitment for up to $200 million in debtor-in-possession financing, and sought the court's permission to access that money to fund normal business operations and other cash needs.

Andrew Turner, chairman and CEO of the Albuquerque, New Mexico-based company, said in a prepared statement that "deep cuts in Medicare reimbursement impacted [the company's] ability to service its current capital structure" and that a "significant decline in the market demand for ancillary services" resulted in a need to "lower operating costs and reduce indebtedness."

The company's debt load is the result of an aggressive expansion strategy, which included the $320 million acquisition of Atlanta-based Retirement Care Associates' 98 facilities and a 35 percent share in its medical supply company. PPS had a serious impact on revenues from its facilities, with per-day rates at some of its SNFs falling 45 percent and revenues from its contract therapy business plummeting 66 percent.

Sun has been negotiating with its banks and senior bond holders for months and, in its petition, said it was close to reaching agreement on the key terms for a financial restructuring. Sun also told the court it was in discussions with the owners of some of the nursing homes it operates to renegotiate certain leases.

Seeking to make some political hay out of Sun's announcement, the American Health Care Association issued a statement, saying that the filing "underscores the severe impact recent Medicare cuts have had on skilled nursing facilities nationwide...Sun joins Vencor and several regional chains, such as Frontier, Newcare, and latros, along with many independent providers, who have declare bankruptcy this year."

Meanwhile, Sun recently announced an agreement in principal with its bank lenders and holders of about two-thirds of its senior subordinated bonds--which together represent $1.3 billion of Sun's capital structure--that would provide Sun's bank lenders with cash, and its senior subordinated bondholders with new common stock. Sun would also provide new long term debt, new preferred stock, and new common stock to general unsecured creditors, and reinstate much of Sun's secured debt.

The agreement, which requires court approval, provides no recoveries for holders of convertible subordinated debt, convertible trust issued preferred securities, or common stock.