County Is First Responder in Ambulance Company’s Bankruptcy

Santa Clara County, Calif. was the first entity to register its appearance in the bankruptcy proceeding of Rural/Metro Corp., and it’s not the possibility the ambulance company’s behind on its taxes that has the county racing to court.

Santa Clara has been worried about the company that has its medical emergency services contract ever since private equity firm Warburg Pincus LLC took over in 2011, County Executive Jeffrey Smith said Monday. The leveraged buyout carried a $738 million price tag, $525 million of it in the form of new debt.

“We were concerned when obviously they notified us of the large debt ratio that they had after the leveraged buyout by Warburg Pincus,” Mr. Smith said. “We discussed with them what their plans were and our concerns. Our chief concerns were quality of service, response times and operational continuity.”

Rural/Metro’s performance under its new private equity owners didn’t please Santa Clara, with repeated late arrivals on the scene of emergencies triggering threats from the county to terminate the contract and warnings that the company’s growing financial troubles should not become a threat to the public health, according to a series of reports in the San Jose Mercury News.

On Saturday, the day before Rural/Metro filed for Chapter 11 protection, the newspaper reported that a Rural/Metro ambulance arrived with failing brakes at a Sunnyvale, Calif., apartment building where a 5-month-old girl had fallen out a window. A county emergency service official is reported as having said the infant suffered no additional harm because of the ambulance breakdown.

The incident highlighted the crucial nature of Rural/Metro’s business, which can mean life or death in small- and mid-sized cities and rural areas, communities too small to support a public ambulance service.

Mr. Smith said it’s good the company is looking to lighten its debt load in bankruptcy, with a commitment from investors for $135 million in fresh cash. But Santa Clara’s still looking for improved performance from Rural/Metro.

“We negotiated a very strict contract with them two years ago, which is known to be hard to comply with,” he said. “We intended it to be that way….By their numbers, it wasn’t profitable at all.”

In the press release announcing the bankruptcy, Rural/Metro noted Chapter 11 would provide an opportunity to renegotiate unprofitable contracts.

Santa Clara’s not worried, Mr. Smith said. “Given that this negotiated bankruptcy has occurred which will infuse the company with more money and change their debt ratio, we think we can negotiate with them at the local level and make the contract compliance more effective for the patients involved,” Santa Clara’s county executive said.

Rural/Metro declined to comment on issues that erupted in Santa Clara and in Syracuse, N.Y., where unnamed company supervisors called for a probe of alleged fraud in paramedic recertification, workplace violence, substance abuse and other alleged problems.  When the Syracuse worries first surfaced last year, Rural/Metro said it conducted an internal investigation and took appropriate corrective action, according to news accounts.

“We have talked to leadership of Rural/Metro and been assured that this restructuring will not affect emergency services in the City of Syracuse in any way and their operations will continue without interruption. We will continue to monitor this situation and take action when deemed appropriate,” Syracuse Mayor Stephanie Miner’s chief of staff, Bill Ryan, said in a statement Monday.

Bankruptcy gives the company the upper hand in dealing with anxious customers, forcing cities that want out of their contracts to come to court first, said Ballard Spahr LLP’s David L. Pollack, who’s not involved in the case.

“Bankruptcy probably staves off any immediate termination of an agreement. It  gives them a little bit of breathing room,” Mr. Pollack said.

“If there are in fact some dire needs, the cities may be able to get relief from the bankruptcy court. Generally, the health of the public is paramount in a bankruptcy,” Mr. Pollack said.

Santa Clara was not at the bargaining table when Rural/Metro worked out its restructuring plan with holders of the bulk of the company’s $735 million in funded debt. The county doesn’t know who the company’s new owners will be, assuming the debt-for-equity swap that is part of the restructuring is ultimately approved by the U.S. Bankruptcy Court in Wilmington, Del., Mr. Smith said.

Is Santa Clara worried that’s the company’s new owners will be distressed-debt investors? “Certainly, it’s a concern. I’m less concerned about that than I was about Warburg Pincus, who clearly was interested in making a quick turnover in cash,” Mr. Smith said.

Warburg Pincus, through a spokesman, declined to comment.

Write to Peg Brickley at [email protected].