Wall Street turns its back on Vencor, Sun. NewCare, and ALC.

As if rumors of imminent Chapter 11 filings weren't bad enough, when Vencor and Sun's net worth fell below the New York Stock Exchange's listing criteria, the two companies were delisted and suspended, respectively.

On June 8, Vencor Inc. announced that the exchange had suspended the Louisville, Kentucky-based company's common stock from trading and that it intended to delist it. A week later, Albuquerque, New Mexico-based Sun Healthcare Group Inc. received a similar notification. Both companies, whose stocks were trading at under $1 a share, took' immediate steps to allow their stock to trade on the over-the-counter bulletin board.

Meanwhile, Atlanta-based NewCare Health Corp. filed for bankruptcy protection in late June (see following item), prompting Nasdaq to halt trading until the company satisfies the exchange's request for "additional information." NewCare was trading at 18-3/4 cents when it got the hook.

And at press time in early July, Assisted Living Concepts was still laboring under the American Stock Exchange's decision, more than 10 weeks earlier, to suspend trading of the Portland-based provider's stock. ALC was suspended for missing the deadline to file its annual report after an audit conducted in connection with its planned merger with American Retirement Corporation found that ALC's black box structure wasn't legitimate, requiring that the company restate earnings going back as early as 1996.

Linda Greub, an analyst with NationsBanc Montgomery Securities, says the delisting of Vencor and Sun "isn't surprising and it shouldn't have an impact. Nobody's buying these stocks anyway. Most of the calls I get on Sun are from debt holders that expect the company to go bankrupt and are betting on them having a decent valuation. The interest is in buying the debt."

Whatever flickering interest institutional investors may have had in Sun and Vencor's stock is likely to be snuffed out by their move to the Bulletin Board, analysts say. "It's just not an orderly trading environment like the New York Stock Exchange," says Robert Mains, an analyst with Advest. "That's why a lot of big institutional traders stay clear of Bulletin Board stocks. You also give up a lot of liquidity when something goes on the Bulletin Board because the bid-ask spread is larger."

Andreas Zirnagl, an analyst with Gerard Klauer Madison, saw it coming. "The Vencors and Suns of the world--and it looks like Mariner's headed down the same path--are reeling under the changes borne out of the Balanced Budget Act of 1997 and lack of profitability, which is also due to their highly levered nature. With unpredictable cash flow, both are unable to adequately service their debt and are headed for some sort of pre-packaged Chapter 11 in which the value of equity will be well-nigh worthless, particularly in Vencor's case because the company has spun off all its assets to Ventas."

Zirnagi is optimistic, however, that both Vencor and Sun will reemerge as more flexibly financed companies. Sun has more of an uphill battle, he says, because it is dealing with a broader array of lenders, including a bank group and several REITs (see related story on page 52).

And reorganization may be easier away from Wall Street's pitiless glare. Volpe Brown Whelan analyst Andrew McPherson says while it's "always disappointing when companies are delisted, it's probably in their best interest to get out of the limelight and spend time fixing whatever needs work."

As for Assisted Living Concepts, the suspension hasn't affected operations. "It's been business as usual," says Nancy Gorshe, senior vice president. "In fact, the lull has been a good time for us to do a lot of internal work."

Analysts predict that when the company is once again traded, volume will be heavy and the price will fall. "Investors have had no way to get out of the stock for almost three months," Zirnagl points out. "There will be a number who will get out no matter what the news. I wouldn't be surprised if the day it opened you see the stock off more than 50 percent. But at least you can say that, at end of day, they'll have the cleanest financial statements of any assisted living company."

Scott Estes, an analyst with Banc of America Securities, says the trading halt has had a ripple effect on assisted living as a whole. "The general sentiment now is at an all-time low for the group," he says, adding that while "the potential of a rising interest rate environment should help the REIT-reliant companies, investors are still asking themselves whether they really need to jump on assisted living stocks now."

PaineWebber analyst Andrew Gitkin believes ALC's accountants are "scrubbing every last detail of the company and it appears that the deeper they scrub, the more they're finding--hence the delay. There's also been some management turmoil at the company. Keren Brown brought in a new CEO--Jim Cruikshank--who brings a whole new perspective."

And Mains notes that, in addition to the merger termination and subsequent audit problems that have caused ALC's stock to fall to below $3 a share, "the leeches of the class action bar are bent on sucking the blood out of them."