Remora

LI, having liberally annointed our back molars with a codeine, or benzocodeine, salve, would like to do a piece on today's big news story. Sorry, the consideration of time as a component of picturing will have to be postponed -- we aren't Boethius, nor were meant to be...

Onto the big story, which as my readers will know by now, is the on-going collapse of National Century Financial Services. Oh, you thought it was the bread and circuses, or rather war games, thing going on in D.C.?

No, today we have an excellent example of why the press can calmly talk about how the "wave of corporate scandals" has broken. That's because nobody wants to talk about it. Plus, no star is involved in this scandal.

The story is in the biz section of the Times.

"The rapid collapse of National Century Financial Enterprises Inc., a large provider of cash flow financing, is sending hundreds of health care companies and their affiliates scrambling to avoid big financial trouble."

Cash flow financing means this. The thirty thousand dollars that X is paying to have his prostate operated on is out there in segments. The insurance is paying for it, but the deductible means that X has to pay for it on credit. Here comes NCF, then, offering to aggregate such debts and securitize them, much as mortgages are securitized. Beautiful, right?

"Two of National Century's largest clients have sought Chapter 11 protection from their creditors, while the dubious status of two of the company's bond deals worth $3.3 billion has set off a spate of threatened legal action against National Century, J. P. Morgan Chase, Bank One and other firms involved in the asset-backed securities. Amid the meltdown, National Century's chairman and chief executive, Lance K. Poulsen, quit both posts on Friday and left the company, which is based in Dublin, Ohio."

Ah, there's a little backstory with this Lance Poulson. And with National Century. But first, here's the fishiness in this creature from the depth. This will tell you pretty much all you need to know about the state of corporate creative financing in this "reform" period:

"This complex brew [of bonds based on hospital receivables] began to boil over in May when the Fitch rating agency warned that it might downgrade National Century bonds, which it did in July. It cited "increasing levels of defaulted and rejected receivables" and a lack of information from the company. This made it harder for National Century to issue new bonds, and the company soon ran into trouble finding the money to pay its clients.

In response, National Century began taking money from the reserve funds of two bond trusts � NPF VI and NPF XII. When J. P. Morgan, as trustee for NPF VI, asked for documentation as to how this was acceptable, National Century stopped taking money from NPF VI and eventually replaced it.

But the trustee of NPF XII, Bank One, is said to have made no such demand, so the company took about $300 million from that reserve fund, draining it to almost zero. At first, bondholders assumed the money went to buy new receivables. But in their motion filed in the Franklin County Court of Pleas in Columbus, Ohio, they say Mr. Poulsen admitted using it for other purposes."

Well, well. It turns out that junior, who flunked eighth grade mass, could have done better than bought the mortgage theory. He could have pointed out that hospital receivables are much more volatile, subject to a much higher percentage of defaults and restructurings. And traditionally, such volatility attracts, well, the loan shark -- because sharks are the type to be able to cover their bets with high interest and the threat of immediate violence following non-payment. Mr. Poulson isn't exactly a loan shark, but according to this account by Doug Noland (who writes the Credit Bubble report for Safehaven, a website for contrarian investors), the history of National Century is spotted with shady characters -- or should we say fly specked?

First, the sentence about the use of NPFXII funds in the Times story is confusing. It implies that the bondholders would be fine with the draining of the reserve fund to invest in further receivables. But of course, that is not what a reserve fund is for -- it is to serve as a barrier against the risk of defaults.

"From Dow Jones� David Feldheim: �No ratings Rx appears in sight for National Century Financial Enterprises (NCFE) amid concerns about revenue streams backing some of its securitizations. In the 11-plus years since its inception, NCFE has become the largest financier of healthcare receivables, according to its spokesman Jim Nickell. Over this period NCFE has securitized in excess of $6 billion of healthcare receivables, and it has bought substantially more than that from providers. It has also drawn recent scrutiny from the ratings agencies who rate those securitizations. Fitch Ratings said over the weekend that it has been informed by interested parties that NCFE directed the trustee to reroute certain funds intended for the NPF XII reserve accounts in order to fund the purchase of new receivables. �The company's apparent willingness to disregard the documents and commit such a serious breach, causes Fitch to question NCFE�s viability.��

Second, how did this company get so big, and why has nobody heard of it? One of the results of "restructuring" investment regulations in the eighties and nineties is that everybody gets to play investment bank. Without any pesky regulators looking at what you are doing. So anywhere cash is being transferred, somebody, somewhere, is trying to get a piece of that. Securitizing, slicing and dicing issues -- it is a wondrous way to make money, as long as you aren't on the other end when the stuff starts coming apart.

According to Noland, the company, founded in 91, has ties to a group of other companies, many of them connected to one Steven Scott. Scott ran a company called PhyAmerica Physician Group, which was delisted by the NYSE when its stock plummeted to pennies. PhyAmerica seems to be running on money loaned to it by NCF. In 2000, this became an issue, as stockholders sued Scott and Poulson for, as they put it, draining the company: "They alleged that Scott and Lance K. Poulsen, National Century�s president, had an agreement: Poulsen would fund Scott�s spending while Scott �looks the other way while Poulsen improperly diverts the company�s cash into NCFE�s coffers.� Even as the company�s finances deteriorated, PhyAmerica bought one corporate jet for $6.6 million and leased another for $848,000 -- expenses that benefited Scott because he owned the aviation company that provided the jets, shareholders said.� Also from the article: �There was a report on �60 Minutes� accusing�Dr. Steven Scott, of hiring doctors who had been disciplined or sued for malpractice.�

Forbes profiled the 'bearded" Poulson, and found him to be sanguine about NCFE -- at least in October. From Risky Business, on Friday October 11, By Seth Lubove:

"In between the court appearances Poulsen has thrived in his niche, making himself and his partners comfortably wealthy, though in ways that might raise eyebrows among traditional lenders. Poulsen, his wife and other company executives, for instance, have occasionally taken personal stakes in NCFE's borrowers. In addition to lending $107 million to something called Med Diversified as of the end of last year, NCFE also owns 6% of the company, or 5 million shares, while Poulsen personally controls another 109,000 shares of preferred stock. Med Diversified also acquired a company that was 22% owned by Donald Ayers, an NCFE cofounder and Med Diversified director. Med Diversified is dependent on NCFE in more ways than one. It derived $4 million in revenues in its 2001 fiscal year from NCFE for various "consulting services," in addition to being owed another $4.3 million in unpaid invoices from NCFE. Another $2 million in revenues during the same period came from an outfit called Millennium Healthcare, a company owned "indirectly" at the time by NCFE. Med Diversified fared badly anyway. It was delisted from the American Stock Exchange in July after losing $605 million in the past two fiscal years on sales of $296 million."

Medicine, attracting only the most sterling kind of entrepreneur! Noland's Safe Haven articule digs up some other intricate connections between NCF, Poulson, and various schemes, in twisted deals that have the involute structure of Jacobean drama, without the pretty poetry. This comes on the heels of two other medical scandals: one at Health South, and one at Tenet. Well, if hospitals start going bankrupt due to this Ohio case, the newspapers might even have to pay attention to it. We'll see.