Forbes ....October 2001 NCFE was viewed as a "train wreck waiting to happen."

National century bust
By Rutberg, Sidney
Publication: The Secured Lender
Date: Saturday, March 1 2003
Subject: Financial services, Bankruptcy, Asset backed securities
Location: United States

National Century Financial Enterprises was billed as the largest and fastest growing receivables finance firm in the healthcare industry. Its receivables-backed paper was rated AAA by Moody's. It signed up for top-of-the-line software technology to control its ever-expanding business so that 300 employees could handle $3 billion in assets.
Since its founding about a dozen years ago, it said it purchased $15 billion in healthcare receivables and, with the help of Credit Suisse First Boston, it securitized $6 billion of them. The company claimed to have earned a net profit in 2001 of $40 million on revenues of $300 million. Trustees of the NCFE securitizations were also top-drawer bankers, J. P. Morgan Chase and Bank One. In short, NCFE was the hottest healthcare financial services organization in the country.
But in late October 2002 Moody's pulled the triple-A rating on the NCFE-sponsored receivables-backed notes and on November 18, 2002, National Century Financial Enterprises filed a bankruptcy petition under Chapter 11 in Columbus, Ohio, with some $3.35 billion in these notes outstanding. About a week earlier, Lance K. Poulsen, one of the founders and chief executive, left the company. The NCFE bankruptcy left many of its clients without financing and several took the Chapter 11 route. Since the bankruptcy, NCFE is being run by the New York-based turnaround specialists, Alvarez & Marsal.
Back in March 2002, a San Jose software company announced with great enthusiasm that it had landed NCFE as a client and that NCFE would be running its entire business operation on the California company's systems. The software company crowed about NCFE and said that with the new technology, NCFE could afford to go after smaller healthcare businesses "whose receivables were below the threshold of NCFE's business model."

It turns out that NCFE, based in Dublin, Ohio, was not all it seemed to be. Among the problems: NCFE or its principals had an equity ownership in the company's major clients; healthcare receivables at best tend to have very squishy valuations; to provide funding for its favored clients, NCFE dipped into the reserves set up as additional collateral for the asset-backed securities issued, and the operations it was financing were largely unsuccessful. There are also charges that NCFE didn't own all the receivables it placed as collateral for the securitizations. Put this all together and it spelled Chapter 11.
In pulling its highest rating from the NCFE paper, Moody's said the action "reflects Moody's concern about NCFE's financial stability, its ongoing ability to service the receivables and its role in directing transaction cash flows" for the notes. Moody's added that "the unique forms of dilution and credit risks associated with healthcare receivables necessitates a transaction structure and servicing that insulates the investor from such risks."
Cutting through Moody's jargon, Ivan Abrams, president of Abrams & Company, Inc., a New York-based finance company that operates in the healthcare field, notes that under the best of circumstances, healthcare is a treacherous area for asset-based financing.
Mr. Abrams noted that, while the healthcare industry is huge and with the aging population probably the fastest growing sector of the economy, it requires a highly disciplined approach. "I really have no first-hand knowledge of what happened at National Century, but I did notice one transaction with a large cash-flow component. This just doesn't make sense in healthcare financing."
Mr. Abrams adds that in the past doctors and healthcare facilities "made money hand over fist so there was no need for disciplined financial management. This psychology has carried over into the present and often there is little sophisticated financial management of these facilities. Thus, in financing this area, lenders must be especially vigilant."
On top of that, dealing with the government (Medicare and Medicaid) can be a slippery slope. "Your records might show that the government owes you $2.6 million and suddenly the government decides that because of some obscure reason it only owes $1.6 million. You've just lost a million dollars. The government has the right to do that."
Also, Mr. Abrams continued, reimbursement levels are constantly changing and this often encourages healthcare providers to boost their billing in the hope that the government or private insurers might pay more. This further complicates the proper evaluation of the receivables.
According to an attorney with a client stuck in the NCFE fiasco, the company must have really taken the advice of the software company to seek "below-threshold" clients. The attorney, who requested anonymity, said that NCFE catered to poor performing healthcare companies "and its formula provided for advances that were a h

Lending to deadbeat companies and providing higher advances to clients than the competition can trigger rapid growth, but it is also the secret to going broke, he said, calling NCFE's operation "a kind of Ponzi scheme." ell of a lot above industry standards."

Among the more prominent victims of NCFE were Credit Suisse First Boston, the underwriter of the NCFErelated securities, and Ambac Financial Group, a large New York-based credit guarantor and financial services company. Credit Suisse, in a strongly worded press release
issued November 25 of last year, just days after the bankruptcy, announced that it, along with other holders of notes related to NCFE, "suffered losses as a result of what appears to be massive fraud at NCFE. It is increasingly apparent that NCFE and its officers deliberately misled CSFB and other investors. CSFB intends to assess the situation as information develops related to NCFE, its officers and directors, and others, and will vigorously pursue those responsible for the losses."
Meanwhile, CSFB said that based on the information available at that time, it was writing down its investment in NCFE paper by 83 percent, from $214 million to $44 million, and will adjust the amount as more complete information becomes available.

Ambac's principal operating subsidiary, Ambac Assurance Corp., a guarantor of public finance and structured finance debt, is rated triple A by Moody's Investor Service, Standard & Poor's and other ratings firms. The parent announced on the day that NCFE filed for bankruptcy that it was taking an after-tax write-down of $79.4 million on notes secured by receivables of NCFE customers. Ambac said it owned $54 million of NCFE-related notes issued by NPF X1I and $120.5 million of another NCFE-sponsored entity. The announcement pointed out that the notes were rated Triple-A until October 25, 2002.

Ambac added that the write-down was based on the best information it had at the time and that it was joining with a group of bondholders to seek recovery of the losses, but noted that no estimate of recovery was included in the write-down. To assure investors that Ambac could afford the write-off, the company pointed out that the fair value of its total portfolio is about $11.7 billion and that after the write-down, it still had net unrealized gains of around $400 million. Additionally, Ambac made it clear that it had no guarantee insurance or other exposure to programs sponsored by NCFE.

Forbes magazine, in scolding the ratings companies and investors for not recognizing the NCFE problems earlier, pointed out last October that the healthcare finance company had been up to its ears in litigation and its ownership interests in a number of its significant clients posed a major conflict of interest. Forbes also noted that, in the healthcare receivables community, NCFE was viewed as a "train wreck waiting to happen."

Among the clients that NCFE or its principals held interests in were Med Diversified, a home healthcare provider in Andover, Massachusetts, Rx Medical Services, a hospital management company based in Fort Lauderdale, and PhyAmerica Physician Group, of Durham, North Carolina.

A Chapter 11 petition filed by PhyAmerica in Baltimore on November 11, lays the blame directly at the feet of NCFE. Noting that it has financed its operations through NCFE since June 1997, PhyAmerica states that since midOctober "scheduled funding was late or unpredictable."

PhyAmerica points out that, on October 25 when Moody's cut the rating on the NCFE paper, the ratings agency stated that NCFE had a "liquidity problem" in funding its clients. NCFE admitted using reserve funds to continue making advances to its clients resulting in an "equity account reserve deficit." A press release by the Fitch rating agency was more specific, PhyAmerica stated. Fitch put the deficit at nearly $325 million, and brought the reserve fund down to .06 percent from the required 17 percent.

On October 31, Mr. Poulsen, at the time CEO of NCFE, sent a letter to PhyAmerica and hundreds of other clients informing them that NCFE would no longer be able to
release funds from the program

PhyAmerica's press release on its Chapter 11 filing also reports that other NCFE borrowers have turned to the bankruptcy courts since NCFE funding dried up. These include Meridian Corp. in Memphis and Tender Loving Care, a home health provider in Boston.
Med Diversified, in which Mr. Poulsen is reported to be the largest stockholder, has also filed for bankruptcy under Chapter 11 and has stated that it plans to file a $1 billion suit against NCFE and the trustees of the NCFE notes, Bank One and J.P. Morgan Chase & Co.
A story in the Washington Post on November 17 made it clear that some of NCFE's shenanigans may provide a fraud case for the federal government. Armed with a search warrant, FBI agents descended on the company's headquarters on a Saturday morning, removing computer equipment, books and records. According to the Washington Post story, NCFE claimed it earned a net profit of $40 million on revenue of $300 million in 2001.

Also, the Securities and Exchange Commission is looking into the goings-on at National Century. The National Century Financial Enterprises story is a long way from over.