US Dermatology Partners defaulted on a $377 million loan last month. Abry Partners, which also owns the Dr. Dental and North American Dental Group dental support organizations (DSOs), acquired the medical services firm as part of its private equity portfolio in June 2016.
Abry Partners financed its acquisition of Dermatology Associates through Golub Capital BDC Inc (GBDC) in June 2016. A public company traded on NASDAQ, GBDC is subject to the rules and requirements of the US Securities and Exchange Commision, unlike privately held companies like Abry Partners.
For example, GBDC is required to conduct quarterly earnings conference calls, which are open records for transparency and public investor review. During the open call on August 8, 2019, Debtwire senior analyst and reporter Bill Weisbrod asked about Oliver Street Dermatology, which is US Dermatology Partners’ parent management company.
GBDC CEO David B. Golub thanked Weisbrod for the question but declined to discuss Oliver Street Dermatology, noting that it wasn’t an appropriate topic for the call. Yet considering US Dermatology Partners’ recent default, it was a very relevant question, and it shouldn’t have been so readily dismissed.
Weisbrod has been raising warnings in what he calls a “race to the bottom” by lenders for corporate debt. He says that “2019 saw lenders increasingly willing to sacrifice protections and terms in credit agreements.” Also, he makes a compelling argument that the market for lenders is saturated and that they are assuming excessive risk to generate meaningful returns.
Interestingly, GBDC has been involved in financing many acquisitions in dentistry and the DSO industry, such as Dental Care Alliance, Sentinel Capital Partners’ ReachOut Healthcare America (which also holds MB2 Dental), Dental Services Group, and Spear Education.
Here’s where things get even more sketchy. BDC Credit Reporter says that no such entitity as US Dermatology Partners nor any business by its previous name, Dermatology Associates, exists, based on its extensive search of Advantage Data records, which is the investment industry’s standard.
BDC Credit Reporteralso says that, after much investigation, debt is carried under the names Oliver Street Dermatology and Derm Growth Partners III. BDC Credit Reportercurrently assigns US Dermatology Partners a credit risk rating (CRR) of 4. With the default, BDC Credit Reporterexpects to downgrade the company by whatever name it’s using to 5.
On a similar note, the Carlyle Group placed its first lien debt to DSO Dimensional Dental on a non-accrual status on August 15, 2019. Dimensional Dental is best known under multi-clinic brands including Eastern Dental, Main Street Dental, Midwestern Dental, Dental Arts, Brighter Dental, and other smaller operations.
Cautionary signs for the dental industry are definitely apparent. Are these signals meaningless outlier aberrations, or valid indicators of a house of cards? Regardless, much of the debt financing the DSO industry seems to be closely linked. A potential domino effect wouldn’t harm a relatively small handful of investors, but it could have a vast ripple influence.
The employment of doctors and dental auxiliaries might be impacted. The public and patient populations also might feel some negative effects.
Abry Partners did not respond to a request for a statement.
Dr. Davis practices general dentistry in Santa Fe, NM. He assists as an expert witness in dental fraud and malpractice legal cases. He currently chairs the Santa Fe District Dental Society Peer-Review Committee and serves as a state dental association member to its house of delegates. He extensively writes and lectures on related matters. He may be reached at mwdavisdds@comcast.net or smilesofsantafe.com.
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