Michigan Hospital Bondholders Would Get Fraction Under Bankruptcy Deal

CHICAGO - Investors holding $38 million of bonds issued on behalf of a Michigan hospital will likely end up receiving just $3.2 million under a deal announced last week allowing the cash-strapped facility to enter bankruptcy before being purchased by a for-profit group of physicians.

Located in the struggling city of Pontiac, the North Oakland Medical Center has defaulted on two of its three trustee payments so far this year. The facility has made only partial payments on its $1 million annual lease to the city, and officials listed the hospital's total debts as more than $100 million in bankruptcy filings last week.

Under a tentative agreement announced by hospital officials last week, the facility would take about two months to complete its bankruptcy proceedings, after which the for-profit group Oakland Physicians Medical Center LLC would pay $8.5 million for the 366-bed facility. About $3.2 million of the purchase price would go the bond trustee, US Bank NA for distribution to bondholders.

The trustee in June distributed "all but a minor hold-back" of the debt service reserve funds totaling roughly $3 million, according to trustee bond counsel Ann-Ellen Hornidge of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC.

The majority of bondholders have agreed to the tentative deal, according to Hornidge.

In recent thin trading the outstanding bonds were changing hands for less than 10 cents on the dollar. They originally were sold with yields between 6.3% and 6.2% in 1993, according to Thomson Reuters.

The $38 million debt is what remains from a $51.8 million hospital revenue bond issue sold in 1993. The Pontiac Hospital Finance Authority issued the bonds. Payments are made under a lease agreement between the authority - which owns the building - and the medical center. The bonds are an unsecured general obligation of the medical center and are not secured by a lien on or security interest in any property of the authority or the hospital, according to the 1993 official statement.

"The bond trustee has been informed that negotiations have resumed and that the parties intend to complete definitive agreements in the near future," US Bank wrote to bondholders in a recent notice. Noting that the bonds are not secured by any collateral interest in the health care assets, the bank outlined the tentative purchase agreement and said it was subject to higher and better offers through bankruptcy sale.

"The proposed $3,260,000 payment is based on certain rights of the bond trustee and bondholders under Michigan law and the bond documents with respect to the authority," the notice said.

The $38 million debt proved to be one of the main stumbling blocks in finding a new owner, according to chief financial officer Michael DeRubeis. Negotiations for a sale came to a standstill in July before last week's announcement of a tentative agreement. During the negotiations, hospital officials held monthly phone calls with bondholders, according to DeRubeis.

The defaults prompted downgrades by Standard & Poor's and Moody's Investors Service last spring to a level of D and C, respectively.

As of 2007, the hospital had roughly $4.6 million in unrestricted cash, and reported operational losses of more than $20 million between 2002 and 2005.

In a sign of the hospital's growing financial stresses in 2008, it failed to make its Jan. 15 and April 15 payments owed to US Bank. The trustee uses the payments due in January, April, and October to cover annual debt service payments, which totaled $3.77 million in 2008. Bondholders receive debt service payments on Feb. 1 and Aug. 1.

US Bank made the Feb. 1 payment with prior installments paid by the hospital and supplemented a shortage in the account with $556,561 from a reserve account, according to an earlier trustee notice. That notice, issued in May, indicates that $3.2 million remained in the reserve and the trustee held another $484,000 in other funds.

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Healthcare industry Bankruptcy
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