On Thursday afternoon, shortly before the UK stock market closed for the Easter break, NMC Health (LSE: NMC) announced it had appointed administrators. This comes after the company was embroiled in an accounting scandal late last year, and NMC Health shares were suspended from trading on 27 February.
Here, I’ll look at what this means for those who own NMC shares. I’ll also highlight two red flags that could have helped investors see this coming.
NMC Health in administration
When a company goes into administration, it’s taken under control by a licensed insolvency practitioner (the administrator). The ultimate objective of the administrator is to decide whether the company has the potential to trade successfully again – possibly after financial restructuring – or whether its problems are insurmountable.
If the latter, it will need to be ‘liquidated’, which means dissolved completely. While in administration, the company can continue to operate. However, it will have protection from creditors, who may be threatening legal action over outstanding debt.
In NMC’s case, Abu Dhabi Commercial Bank – which is owed almost $1bn by the company – pushed for administration. It feared NMC would be unable to pay employees in the months ahead and that the whole company may collapse.
Bad news for shareholders
For company shareholders, going into administration is generally very bad news. This is due to the fact that, if the administration involves a sale of all or part of the company’s assets to pay off creditors, shareholders are last to receive anything. They rank behind bond holders in terms of priority. Most of the time, they end up receiving nothing.
Looking at NMC Health, it’s too early to know if shareholders will get anything back. However, my personal view is it’s unlikely. I say this because, last month, investigators discovered the company had undisclosed debt of $4bn, taking its total debt to over $6.5bn. This is far higher than the assets and equity on the company’s books at 30 June.
NMC Health shares: two red flags
Looking back, there were certainly a few red flags here that could have helped investors avoid this mess.
For a start, there was the short attack by research firm Muddy Waters in December. In a highly critical 34-page report, Muddy Waters said it had “serious doubts” about NMC’s financial statements and that it believed NMC had “manipulated its balance sheet to understate debt.”
Whenever a company gets attacked like this, it pays to be very careful. This is because you can be sure the shorter has done their research. Looking back, Muddy Waters’ research was on the mark, as NMC understated its debt massively.
Secondly, earlier this year, a number of insiders at the company, including founder and chairman Bavaguthu Raghuram Shetty and vice-chairman Khalifa Al Muhairi, offloaded a huge number of NMC Health shares. Between them, they sold nearly £200m worth of shares in January and February.
Insider selling is not always a bearish signal. There are plenty of legitimate reasons for insiders to sell shares. However, in this case, the selling certainly didn’t look good, given the doubts over the group’s balance sheet.
Had investors sold NMC Health shares on spotting these red flags, they may have been able to protect their capital.