On May 11, 2010, Chem Rx Corporation (“Chem Rx” or “Debtor”), filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. Based in Long Beach, New York, Chem Rx claims to be the third largest long term care pharmacy in the United States (a link to the company’s website is available here). Chem Rx’s customers include nursing homes, group homes, correctional institutions and other long-term care facilities. The company sells both prescription and non-prescription drugs, medical equipment and surgical supplies to institutions in New York, New Jersey, Pennsylvania and Florida. See Chem Rx’s Declaration in Support of Chapter 11 Petitions and Request for First Day Relief (the “Declaration“) at *2.
As stated in its Declaration, Chem Rx was founded in 1958 as a retail pharmacy in New York. By growing internally, and making certain acquisitions, Chem Rx grew to be the third largest long-term pharmacy in the U.S., behind Omnicare, Inc. and PharMerica Corporation. The Debtor operates under four subsidiaries, each licensed in a separate state. Acting primarily as a distributor, Chem Rx purchases pharmaceuticals in bulk and re-sells the product in response to physician orders.
Events Leading to Bankruptcy
Towards the end of 2008, the Debtor experienced an increase in “doubtful accounts” on its books, which in turn led to three covenant violations under various loan agreements. Following the covenant violations, the Debtor’s first lien lender cut access to a revolving line of credit. Once Chem Rx’s vendors learned of the company’s covenant violations, they began limiting trade credit. According to the Declaration, Debtor’s trade credit was reduced by more than $15 million in 2009. See Declaration at *10.
Objectives in Bankruptcy
Chem Rx’s loss of trade credit with its vendors, compounded by the loss of liquidity with its lenders, forced the company to reduce costs and eliminate certain expenditures. Despite such efforts, the company could not meet its debt obligations with its prepetition lenders. During the year prior to bankruptcy, Chem Rx and its lenders tried unsuccessfully to restructure the company’s debt out of court. Also during this time, the Debtor was approached by a potential purchaser, however, negotiations eventually stalled.
In March of this year, Chem Rx’s first lien lender advised the Debtor that it would agree to a consensual reorganization under chapter 11. Under a negotiated term sheet, Chem Rx agreed to hire an investment banker to assist with the marketing and sale of the business. However, should no offers materialize that are acceptable to the first lien lender, the lender would receive all of the Debtor’s equity in a reorganized company.
This bankruptcy proceeding is before the Honorable Mary F. Walrath, former Chief Judge of the United States Bankruptcy Court for the District of Delaware. For a better understanding of this proceeding, a copy of the Debtor’s First Day Declaration is available here. Further, a copy of the Debtor’s bankruptcy petition is available here.