QHC Quorum Health Corporation

Exhibit 99.1

April 8, 2020

T. Patrick Tinker, Esq.
Office of the United States Trustee
     for the District of Delaware

844 King Street

Suite 2207

Wilmington, DE 19801

Dear Mr. Tinker:

We represent Mudrick Capital Management, L.P. (“Mudrick”), which is the beneficial owner of approximately 15% of QHC’s equity securities. On behalf of Mudrick, we respectfully request that the United States Trustee for the District of Delaware (the “U.S. Trustee”) appoint an official committee of equity security holders (an “Official Equity Committee”) pursuant to section 1102(a)(2) of title 11 of the United States Code (as amended, the “Bankruptcy Code”) to assure adequate representation of the interests of all QHC shareholders. As set forth in detail below, there is every reason to believe that significant equity value exists for the existing shareholders of QHC. However, without the appointment of an Official Equity Committee, there is no estate fiduciary to represent shareholder interests, as the Board of Directors and management team now in control of QHC have abandoned those interests in favor of those of QHC’s noteholders.

Yesterday (the “Petition Date”), QHC filed an 8-K with the Securities and Exchange Commission that disclosed the Company’s entry into a restructuring support agreement (the “RSA”) with certain lenders representing approximately 74.7% of the obligations outstanding under the Company’s First Lien Facility and 97.3% of the obligations under the Senior Notes.¹ The RSA sets forth the terms of a pre-packaged plan (the “Plan”) for a balance sheet restructuring that QHC filed yesterday with its voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code filed in the United States Bankruptcy Court for the District of Delaware, jointly administered under Case No. 20-10766 (KBO) (the “Chapter 11 Cases”). It is our understanding that solicitation of the Plan commenced on April 6, 2020 with respect to certain classes of creditors and that QHC is seeking an extremely expedited combined disclosure statement and confirmation hearing in 33 days, on May 11, 2020, a date itself almost a month earlier than the self-imposed June 6, 2020 outside date in the RSA. As discussed, the RSA parties plainly intend this ultra accelerated timeframe to frustrate the evaluation of QHC’s legitimate shareholder interests.

¹ For a complete list of noteholders, please see the signatories to the RSA.

Pursuant to the Plan, there are ten classes of creditors only two of which are deemed impaired and entitled to vote: the First Lien lenders and the noteholders. All allowed administrative claims, priority tax claims, other secured claims, and other priority claims will be paid in full in cash or receive such other treatment to render the claims unimpaired. Similarly, the allowed DIP claims, ABL claims, and the general unsecured claims will be paid in cash or otherwise unimpaired. Each Holder of an Allowed First Lien Loan Claim shall receive such Holder’s pro rata share of (a) the First Lien Loan Claims Paydown Amount; and (b) the Exit Facility. The claims of the Senior Notes will be discharged in exchange for 100% of the New Common Stock, subject to dilution for certain issuances of new common stock and interests in a QHC Litigation Trust. Though all general unsecured creditors are paid in full in cash, the Plan provides zero recovery to QHC’s pure shareholders, i.e. those shareholders that do not also own Senior Notes. Thus, the Plan provides that all existing equity will be wiped out and all reorganized equity provided to QHC’s senior noteholders.

This scheme must be carefully scrutinized and evaluated by the Court, through an estate fiduciary, because equity is decidedly in the money in this case. QHC’s own financial advisor has opined that according to its analysis, which has not yet been fully disclosed or subjected to any discovery or review, the upper range of the value of the Company is $1.275 billion, which is only $32 million below the reported debt on the valuation date.² Thus, a mere 2% increase in value (or a tenth of a point in an applicable multiple) using the Company’s metrics would put equity in the money – on the RSA parties’ valuation even before an Official Equity Committee can make its case. Furthermore, even that valuation does not appear to take into account the value of any cash that QHC had on hand on the valuation date and specifically excludes the $10-$20 million of assistance that the Company believes it will receive under the CARES Act. More fundamentally, it does not take into account that QHC and the noteholders are opportunistically valuing the Debtors at their low point, during a worldwide pandemic, without taking into account the increased value that the Debtors’ own management projects will be realized in the near future after operating performance is stabilized and improved. The complete elimination of the existing stockholder’s equity in QHC results solely from QHC’s misguided agreement to give control of the Company and its restructuring to its noteholders, despite the absence of any monetary default under any of the loan agreements and despite QHC’s projection of sustained, long term profitability after the resolution of the COVID-19 pandemic.

² The valuation analysis is based solely on the Debtors’ assumptions and projections that appear in its analysis that is attached as Exhibit E to its Disclosure Statement. Mudrick does not have the benefit of all necessary information to assess the Debtors’ assumptions and projections and expressly reserves its right to challenge any and all assumptions and projections therein. Use of the Company’s numbers in this letter is purely illustrative.

The appointment of an Official Equity Committee is also required because there is no indication that any non-conflicted party independently evaluated the Debtors’ RSA and proposed Plan. To the contrary, all parties that negotiated and entered into the RSA – including QHC’s Board of Directors and management -- will benefit from consummation of the proposed plan at the expense of the Company’s equity holders. Indeed, the only purported equity holders at the negotiating table were the conflicted noteholders that, collectively, also controlled 97.3% of the outstanding Senior Notes. Given that these same noteholders only controlled 38% of the equity, it is simple to see that it was much more economically efficient for them to take QHC’s equity through their note holdings rather than their equity. If they had done the latter, they would have had to share the recovery with the other 62% equity holders – including Mudrick and the large number of retail shareholders. Rather than do so, they sacrificed their minority shareholdings in favor of their overwhelming note holdings. There simply is no basis to suggest that these holders acted for equity as they agreed to extinguish it. Instead, these holders used their seat at the table during the past six months of negotiations with the Company, while trading outstanding notes amongst themselves, to orchestrate a scheme to crowd out the remaining 62% of equity holders. More troubling, when Mudrick contacted the Company on March 23, 2020 to request a meeting to discuss the rumors about a potential restructuring that would deny value to equity holders, the Company completely ignored it. To date, the Company has yet to respond to Mudrick, nor even mention its attempt to engage with the Company. Rather than explaining itself and defending its decision, the Company hid. An Official Equity Committee will ensure that the Company will not be able to ram its Plan through and squeeze out equity without a full Court review.

An Official Equity Committee must be appointed to challenge the noteholders’ egregious overreach to take value that belongs to the equity. And, because of the extremely, albeit self-imposed, expedited timeline set forth in the RSA, time is of the essence. QHC’s Board of Directors, whose fiduciary duties run strictly to QHC’s shareholders where, as here, the Company is solvent, has instead abandoned this duty. Accordingly, no estate fiduciary is representing the interests of the shareholders. Moreover, because the Plan provides for payment in full to all general unsecured creditors and 97.3% of the noteholders have signed the RSA, there will be no official committee of unsecured creditors. Thus the only estate fiduciary is the Company itself, which has already acted to wipe out its shareholders’ interests. An Official Equity Committee is absolutely necessary here to ensure that shareholders are adequately represented.

The Relevant Criteria for Establishing
an Equity Committee Are Satisfied Here.

The requisite factors for the appointment of an Equity Committee under 11 U.S.C. § 1102(a)(1) are met here:

(a) the interests of shareholders are not otherwise represented;

(b) QHC is not hopelessly insolvent, such that Mudrick and other shareholders have a real economic stake in the Chapter 11 cases;

(c) the case is large and complex;

(d) the stock is widely held and actively traded;

(e) the timing of the request is appropriate.

See, e.g., In re Spansion, Inc., 421 B.R. 151, 156 (Bankr. D. Del. 2009); In re Pilgrim's Pride Corp, 2009 WL 1231251, at *3 (Bankr. N.D. Tex. Apr. 30, 2009); In re Williams Commc 'ns Group, Inc., 281 B.R. 216 (Bankr. S.D.N.Y. 2002); Exide Tech. v. State of Wisconsin Inv. Bd., 2002 WL 32332000, at *1–2 (D. Del. Dec. 23, 2002) (appointing equity committee over objection of debtor and official committee of unsecured creditors). No single factor is dispositive and the weight attributed to each factor is determined by the facts of each case. In re Kalvar Microfilm, Inc., 195 B.R. 599, 600–01 (Bankr. D. Del. 1996)

Shareholders Are Not Adequately
Represented Without an Official Equity Committee

No group of existing creditors or interest holders in the case will adequately protect and represent the interests of shareholders. Although the existence of a creditors’ committee may, in some circumstances, be deemed sufficient to protect the interests of shareholders in addition to that of creditors, that scenario is not applicable here. As stated above, the Chapter 11 Cases will likely not require the appointment of an official committee of unsecured creditors. The RSA currently contemplates that general unsecured creditors will receive payment in full in cash on account of their claims and 97.3% of the noteholders signed on to the RSA. The Debtors have requested that a meeting of creditors not even be convened. Thus, Mudrick respectfully submits that an Official Equity Committee should be appointed in lieu of a creditors’ committee. Even in the unlikely event that a creditors’ committee is appointed in the Chapter 11 Cases, it cannot represent the interests of shareholders. To the contrary, a creditors’ committee would be aligned with QHC and fight for the confirmation of the Plan because it does not stand to gain by maximizing value beyond that contemplated by the RSA or challenging any behavior or transactions leading to the filing of the Chapter 11 Cases because all general unsecured creditors will be paid in full and the noteholders are taking all of the reorganized equity.

Further, although QHC’s directors and officers have fiduciary responsibilities to protect shareholder interests, their consent to the RSA effectively precludes them from taking any action to challenge it. An Official Equity Committee is needed to enable shareholders to participate fully in the Chapter 11 Cases and protect their interests. Leaving the shareholders the unsustainable burden of individually protecting their interests while the Company uses its financial resources to compensate the professionals of all RSA parties means shareholders are illegitimately disenfranchised. The Board has elected to promote creditor interests, not in priority to shareholder interests, but in exclusion of shareholder interests.

Under circumstances far less troubling than those that exist here, in Oneida, Judge Gropper determined that it would be “unrealistic” to rely on “the usual presumption that the Board will pay due ... regard to the interests of shareholders.” In re Oneida Ltd., No. 06-10489 (ALG), 2006 WL 1288576 at *2 (Bankr. S.D.N.Y. May 4, 2006). There, the debtor’s lenders, as part of an initial out-of-court restructuring step, gained effective control of the debtor’s board through exercising the right to appoint six of the nine directors. Id. Even though the court explicitly disclaimed finding any impropriety by the lenders or any board member, the court determined that the moving equity security holders had carried their burden to show that an equity committee was “necessary” within the meaning of section 1102(a)(2) of the Bankruptcy Code, given that it was “the subsequent Board that endorsed a plan of reorganization that wipes out old equity and allocates all of the equity of the reorganized companies to those Lenders who are not being paid in full.” Id. Judge Gropper reasoned, again disclaiming that any finding of wrongdoing was being made, that the absence of the “usual checks and balances” present in most bankruptcy cases and “due regard for appearances” warranted the appointment of an official equity committee. Id. at *3.

Much the same is true here and more. QHC and the noteholders have had months to engineer the Debtors’ restructuring and prepare for this bankruptcy and have used that head start to neutralize the checks and balances that would normally exist to prevent the type of overreaching that is evident in, among other things, the purported prepackaged Plan that was filed on the Petition Date. Indeed, the case has been put on the fastest of tracks – during a worldwide pandemic -- for no purpose other than to avoid any meaningful equity valuation or oversight of the proposed reorganization. If, for no other reason than to protect the appearance that justice is being done in these bankruptcy cases, it is imperative that the U.S. Trustee appoint an Official Equity Committee.

QHC is Solvent.

QHC’s case is about short-term liquidity (already addressed), not solvency. QHC is solvent. It expects a brief downtick in earnings due to the worldwide COVID-19 pandemic – like every other company – and then expects to recapture these earnings in the second half of 2020 and thereafter. Indeed in its recent 8-K, QHC itself said “in 2021 and beyond, management does not expect there to be a material impact to the business from COVID-19.” Yet, the Company and its noteholders seek to rush to confirmation using a temporary pandemic-related earnings trough to drive an opportunistic false valuation at a time that equity is not adequately represented. Again, QHC is solvent when viewed on a normalized basis. And the legal standard necessary for appointment of an Official Equity Committee requires even less. The legal standard for hopeless insolvency is not whether a debtor is insolvent, but whether it “appears to be hopelessly insolvent.” Williams Commc’ns, 281 B.R. at 220–21 (emphasis added). See also In re Sun Edison, Inc., 556 B.R. 94, 103 (Bankr. S.D.N.Y. 2016). All that is required is a “reasonable prospect of receiving a meaningful distribution”. Spansion, 421 B.R. at 157. Here there is not only “hope” of solvency, there is actual solvency. The Company’s own projections, using normalized (i.e. not-COVID-19 impaired) earnings under any rational market multiple shows substantial equity value.

Accordingly, the Company is currently solvent and there remains substantial value for shareholders. QHC’s own accounting indicates that substantial equity value exists. This cannot be seriously contested – the Company’s largest creditor and signatory to the RSA, KKR Credit Advisors (US) LLC (“KKR”), acknowledged publicly in a Schedule 13D filing with the SEC in December that, even valuing the Company on a distressed basis, equity value exists.³ Additionally, management’s own projections indicate that the Company’s enterprise value will substantially increase over the next several years. These projections, as outlined in the Disclosure Statement, show that normalized EBITDA will increase to $177 million next year and $204 million by 2023. Using a reasonable valuation multiple, these projections result in equity value of up to $12 per share. Given management’s efforts and this potential value, now is not the time to let the Company pursue a restructuring process that wipes out all existing equity.

The Chapter 11 Cases Are Large and Complex.

Appointment of an Official Equity Committee is further supported by the complexity of these cases. See Albero v. Johns-Manville Corp. (In re Johns-Manville Corp.), 68 B.R. 155, 159 (Bankr. S.D.N.Y. 1986) (indicating that the appointment of an equity committee in complex bankruptcy proceedings is justified because complex cases require active participation by shareholders, rather than merely voting on a plan); see also Pilgrim’s Pride, 407 B.R. at 220 (stating that the appointment of an equity committee is more appropriate where the complexities of a case make it more difficult for another entity to represent equity holders’ interests).

QHC is the operator of general acute care hospitals and outpatient healthcare facilities. According to the petition, QHC, which filed on behalf of itself and multiple affiliates, reports $373.1 million in assets and $1.3 billion in liabilities. QHC has estimated that the enterprise value of the Company is in the range of $965 million to $1.275 billion, and the proposed restructuring contemplates a host of transactions including a $100 million DIP loan, an Exit Facility, a $200 million Equity Commitment Agreement, a management incentive plan, a litigation trust, and new senior credit facilities. Although the Company is intent on rushing through its restructuring pursuant to the terms of the RSA, it remains unclear whether that is in the best interest of all stakeholders. Indeed, based on QHC’s prepetition conduct and the terms of the RSA it appears that the Chapter 11 Cases are being run for the benefit of the note holders, not the shareholders. As a result, there are numerous issues that must be investigated and addressed including, but not limited to, QHC’s original business plan, its revised projections, the pre-COVID-19 projections on which KKR was making an equity offer, the events leading to the RSA, the value of the Company, and the propriety of the proposed releases in the Plan. See In re Pilgrim Pride Corp., 407 B.R. 211, 220 (Bankr. N.D. Tex. 2010) (“appointment of [an equity committee] is more appropriate where the complexities of the case make it more difficult for another—here management—to protect equity interests as well as those of creditors.”).

³ A copy of KKR’s Schedule 13D filing is attached hereto as Exhibit 1.

The Stock is Widely Held and Publicly Traded.

There is no dispute that this factor weighs in favor of an Official Equity Committee. As of the date of this letter, there are over 32,000,000 shares of QHC’s stock that are publicly traded with an average volume of 275,000, many of whom are retail holders.

The Request is Timely.

QHC’s Chapter 11 Cases were commenced yesterday, announcing their entry into an RSA with 97.3% of the holders of obligations under the Senior Notes and 74.7% of the obligations under the First Lien Facility. The “first day hearing” isn’t until tomorrow, April 9, at 1:30 p.m. ET. QHC also announced that solicitation of the Plan is underway with a voting deadline for shareholders of May 4, 2020 and a joint plan confirmation and disclosure statement hearing shortly thereafter. There are also other milestones under the RSA, including an April 10 deadline for entry of an interim DIP Order, May 12 for entry of a final DIP Order, and a May 11 combined disclosure statement/confirmation hearing. Not only is this request for an Official Equity Committee timely, appointment of an Official Equity Committee must occur now because any delay will necessarily threaten the committee’s ability to analyze and scrutinize the Plan on the Debtors’ own lightspeed timeline. Therefore, it is imperative that the utility of the time remaining is maximized because so little time exists.

There are no exigent circumstances requiring that the Debtors fast-track their reorganization. The Debtors are operating their businesses in the ordinary course, in fact paying all unsecured creditors currently, are not experiencing short term liquidity issues, and appear to have adequate access to cash. Indeed, it is public knowledge that bankrupt hospitals are in high demand as was recently reported in the Wall Street Journal, and a market test may ultimately be warranted.⁴ The ineluctable conclusion is that the Debtors have agreed to file their Chapter 11 Cases and proceed with the Plan on an unnecessarily expedited basis at a logistically difficult time for the entire world in order to rush through confirmation without any meaningful analysis of the Company’s actual value and the destruction of shareholder value. This is yet another reason why an Official Equity Committee is so urgently needed in this case.

Mudrick is mindful of concerns regarding the expense associated with the formation of an Official Equity Committee, but submits that cost alone is not sufficient to defeat such formation. See In re Beker Indus. Corp., 55 B.R. 945, 949 (Bankr. S.D.N.Y. 1985) (“The statutory focus is on adequacy of representation. . . . [O]nce the statutory tests are met, the burden shifts to the opponent of the motion to show that the cost of the additional committee sought significantly outweighs the concern for adequate representation and cannot be alleviated in other ways.”). Indeed, as stated above, it appears that these cases demand the appointment of an Official Equity Committee instead of a creditors’ committee, which would greatly mitigate this cost. Moreover, in addition to sacrificing representation of equity the Company has already agreed to pay not only its own professional costs but those of each of its Secured Lenders, the noteholders, and individual noteholders. The additional expense of an Official Equity Committee is but a small additional expense to ensure a level playing field for equity to be represented.

⁴ See Coronavirus Crisis Puts Bankrupt Hospitals Back in Demand, Wall Street Journal, April 6, 2020, located at https://www.wsj.com/articles/coronavirus-crisis-puts-bankrupt-hospitals-back-in-demand-11586165400.

Accordingly, it would be unjust for the Debtors to pursue their Plan without any official input from shareholders. Only then, can we ensure that the Company’s value has been realized by its shareholders and the process is fair and equitable. We respectfully request that you appoint an Official Equity Committee at your earliest possible opportunity.⁵ We are sure you recognize the need for speed in this instance. We welcome the opportunity to answer any questions you may have.

⁵ Nothing herein shall constitute an admission or waiver of any rights or remedies by Mudrick; all such rights and remedies are expressly reserved.

EXHIBIT 1