Iowa hospital seeks bankruptcy to implement acquisition plan


An Iowa hospital filed for Chapter 11 bankruptcy this week, blocking a move by its largest bondholder to seek a court-appointed receiver and the immediate payment of principal and interest. 

Monday’s filing by Mercy Hospital in U.S. Bankruptcy Court for the Northern District of Iowa stays the receivership case brought by the bond trustee Computershare Trust and bondholder Preston Hollow Community Capital in Johnson County District Court July 24, according to the filing.

Iowa City-based Mercy Hospital said it filed a Chapter 11 bankruptcy that will allow it to implement a plan for the University of Iowa to acquire essentially all of its operating facilities and key assets.

Mercy Iowa City

The Iowa City hospital said the voluntary bankruptcy will allow it to implement a plan for the University of Iowa to acquire substantially all of its operating facilities and key assets. 

“Mercy expects to seek approval of a sale process with the university serving as the ‘stalking horse bidder’ with the goal of transitioning the hospital and its employees to a new owner and operator that intends to preserve the services provided by the hospital to the community,” it said in a statement.

The Iowa Board of Regents Tuesday unanimously agreed to pay $20 million for real estate and business assets in a deal under which it would not assume Mercy’s debt obligations.

Mercy sold $44.6 million of health facilities revenue bonds through the city of Hills, Iowa, in 2011, followed by $41.76 million of unrated bonds in 2018 bought by Preston Hollow. Outstanding principal totals $62.145 million as of July 31, according to the bankruptcy filing.

A declaration filed in bankruptcy court by Mark Toney, the hospital’s chief restructuring officer, said public disclosures by Preston Hollow and the impact of a potential receivership “resulted in employee resignations, patient cancellations, canceled job interviews and delayed new employee start dates, and ultimately impacted Mercy Hospital’s ability to serve its patients.”

“It is uncontroverted that the careless and callous actions taken by Preston Hollow jeopardized the health and well-being of Mercy Hospital’s patients, the viability of Mercy Hospital’s future, and damaged the organization’s reputation, all resulting in significant and negative destruction of value for all of Mercy Hospital’s stakeholders (including Preston Hollow),” Toney’s declaration stated.

In a statement, Preston Hollow said the hospital’s bankruptcy decision “is the result of years of financial mismanagement and an ongoing refusal to take the necessary steps to restructure and stabilize its operations.”

“Even now, after years of inaction on their part, the hospital chooses to point fingers at others rather than take any accountability for their financial losses or demonstrate any willingness to seriously address the factors that led to those losses,” the statement said. 

The bond trustee posted notices of default July 19 on the Municipal Securities Rulemaking Board’s EMMA website that included the hospital’s failure to comply with certain financial covenants under the master trust indenture and other bond documents and its “inability” to pay prospective debt service. Mercy countered with its own disclosure posting on July 21, contending it had not defaulted. 

In a July 24 notice to the hospital, Computershare Trust and Preston Hollow declared principal and unpaid accrued interest on all outstanding bonds under the master trust indenture “immediately due and payable.”

Moody’s Investors Service, which originally rated the 2011 bonds A2 and most recently downgraded the debt to Caa3, said Tuesday it withdrew the rating due to the bankruptcy filing. 

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