The impact of the Covid-19 pandemic on the healthcare sector is immense and varied, with nuances by subsector and geographic region. A significant aspect of the emergency and acute care delivery system has mobilized to address the virus while healthcare services focused on non-essential and elective care have been delayed. These factors will most certainly impact the M&A landscape for the foreseeable future. Our primary concern at Enhanced Healthcare Partners is the health and safety of our clinicians and patients. Gratitude abounds for those on the frontlines working to keep patients healthy. Type of care determines business impacts As we evaluate the economic effects of the novel coronavirus pandemic, we bifurcate our outlook into the long and short-term. The restrictions on economic activity and the timeline for containing the virus will heavily impact subsequent effects. These impacts will vary greatly based on industry sub-sectors, which we categorize into three groups—emergency, essential non-emergency and elective care. The need for emergency care has surged with the influx of patients requiring testing and treatment for Covid-19. Our portfolio includes a spectrum of healthcare companies, including urgent care facilities, ambulance services and pharmacy services, that have mobilized to address the pandemic in distinct ways. These companies already have strict sanitization standards and we have enacted additional measures to ensure the health and safety of our clinicians and patients as they address this highly contagious virus. While they vary by company, some examples include checking the temperature of employees as they arrive for work, tracking symptoms of patients, ensuring those who test positive are following quarantine protocols and temporarily closing clinics for cleaning. We are doing everything we can to keep essential providers safe and operational for the patients and communities they serve. Ensuring these businesses have the necessary resources during these uncertain times allows us to continue to care for sick patients when they need us most. As such, we have worked with our lender partners to ensure we have strong balance sheets to navigate these uncertain times. Supply costs for PPE have risen dramatically and we are working with payors to find opportunities to offset those costs. In addition, we are identifying costs and lost revenue directly related to Covid-19 and are working with our lender partners to recognize these as addbacks or non-recurring expenses for covenant and reporting purposes. At the start of the pandemic, Medicare and the CDC issued guidance that non-essential healthcare be delayed. Clinicians, supplies, hospital beds and beyond have been focused directly toward the front lines of the virus fight. As a result of these needed initiatives, a backlog of essential non-emergency care has grown over the past few weeks. Medicare has provided protocols to aid decision-making on what care should be provided during the pandemic but has allowed clinicians and localities flexibility in their approach. We anticipate that a backlog of essential non-emergency care will begin to unwind in the near-term, which will place additional demand on the healthcare system. There are important, sometimes life-saving procedures that need to be provided in tandem with caring for those impacted by the virus. Healthcare businesses that primarily offer elective procedures are seeing adverse effects, and there is significant uncertainty around when elective based healthcare will normalize. Primary care, family medicine, podiatry, dermatology and dentistry, to name a few, have all been impacted with reduced volumes as all routine and elective care is delayed. Current legislation has not targeted assistance to these healthcare services, though some specific measures are being discussed. In the long-term, demand for these elective care businesses should not change, though the delivery system will likely evolve with telemedicine and other remote care initiatives currently ramping. Many providers are discussing altering their schedules through the summer and beyond to accommodate an influx of patients once they are allowed to reopen. Some have deliberated being open six days per week to catch up on the demand. Healthcare overall is a resilient sector. We do not expect systemic demand shocks to persist in most healthcare services. Though, the longer the restrictions persist, the greater the uncertainty of what’s to come. M&A, deal structuring and valuations The short-term impacts on M&A have been widely reported. Many healthcare deals with an imminent close are continuing to completion, albeit on an elongated timeline with potential holdback structures to accommodate virus-related uncertainty. Others, particularly transactions that were earlier in the process, have been paused or halted on a case-by-case basis. The lender community will be a significant driver of M&A activity and valuations in the long-term. If the virus is contained relatively rapidly and economic activity normalizes soon, lenders may be able to bounce back quickly. With the heightened risk of the macroeconomic outlook, we expect interest rates to increase and underwriting to become more disciplined. For now, many lenders are saying they are “open for business,” though traditional bank financing has pulled back almost entirely. We expect some unitranche lenders to lean in during this market with higher costs given the risk. In the event of a more prolonged economic contraction, lenders will pull back, and valuations will likely drop. Creative deal structuring will likely facilitate dealmaking in this environment. We expect to see more seller financing and the use of holdbacks to accommodate potential tightening within the lender community and the Covid-19 related financial decline. These instruments will have meaningful interplay with overall deal valuations. Healthcare companies looking to transact will have complexities managing and explaining their business during the virus crisis. Financial results for most healthcare businesses will be impacted in some fashion depending on the sector. Those that are driven by elective procedures will have a meaningful deviation from historical results. Moreover, the payor mix for healthcare businesses will likely shift with increases in unemployment. Trended and historical data may not be as relevant and, as a result, solidifying a business narrative could be difficult. Companies will benefit from detailed tracking of Covid-19-related expenses as we expect an industry standard will be developed around addbacks for these unexpected costs. Whether for a transaction, a loan or general good financial record-keeping, companies will need to provide details to explain the business implications of the pandemic. The more forward-facing and meticulous they can be about carving those expenses out from normal operating costs, the better. Additionally, there will be many companies struggling in this environment. The deal community will likely mobilize around these businesses to present fast-tracked sale or investment opportunities. Right now, there is no “normal” All facets of the healthcare industry face new challenges each day as the pandemic progresses. The strain hospitals and clinical staff are confronting are unprecedented. We are pleased, but not at all surprised, to see healthcare businesses mobilizing and clinicians offering to adapt their practices to support hospitals in the fight against Covid-19. This underscores the critical need for investment in our nation’s healthcare businesses and the necessity to remain agile as the environment transforms around us.