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Ohio Hospital Goes For-Profit

CHICAGO — Ohio’s bankrupt Forum Health this week announced an agreement to sell its assets to a for-profit health care provider, marking the third proposed sale of a financially struggling nonprofit provider to a for-profit entity in the last few months. 

Forum, a three-hospital, junk-rated system based in Youngstown, agreed to sell its assets for $69.8 million to Nashville’s Ardent Health Services, a health care provider that is owned largely by New York private-equity firm Welsh, Carson, Anderson & Stowe.

Forum’s Chapter 11 status is likely to complicate the proposed sale. Already some of its creditors, including MBIA Insurance Corp., which insures most of its outstanding bonds, are objecting to the sale. Ardent’s bid does not include taking over Forum’s $130 million of bonds. 

Forum’s announcement came just days after the Detroit Medical Center reached a final agreement with Tennessee’s for-profit Vanguard Health System to sell its assets to Vanguard in a $1.2 billion deal. The Michigan attorney general still needs to sign off on the sale.

In Massachusetts, a plan to sell Boston’s Caritas Christi Health Care to private-equity group Cerberus Capital Management LP continues to wind its way through the approval process in that state.

For Ardent, Forum’s intact ­system and location in a region that could be poised for growth makes it an attractive purchase, a spokesman said.

“It’s rare that you come along a system that’s still together and that has a good market share,” said Kevin Gwin. “The area has been hit hard by the recession, but we see a lot of signs it’s beginning to turn a corner. General Motors is expanding there, and we’re seeing unemployment drop in the last month. There are a lot of patients in their hospitals and a lot of physician support and we see a lot of potential.”

Like DMC and Caritas, Forum treats a high number of uninsured and Medicare-dependent patients, which means it is poised to gain from the new federal health care law that will require coverage for most Americans in the next six years.

“Health care reform is going to help hospitals, we believe that to be the case,” Gwin said. “Hospitals carry a significantly large load of indigent and uncompensated care, and health care reform is going to help with that.”

Forum over the last few years has been in talks with at least two providers, including Catholic Healthcare Partners, to sell some of its assets, and it has tried to implement turnaround plans to improve operations and stem losses.

Despite the efforts, the system filed for Chapter 11 protection in the U.S. Bankruptcy Court of the Northern District of Ohio in March 2009.

Unlike the proposed sales of DMC and Caritas, Forum’s purchase agreement does not include the assumption of its outstanding bonds.

In an e-mail, Forum officials said: “Proceeds [of the sale] will be distributed — to the bondholders and others — in the manner provided by the Bankruptcy Code, as ultimately approved by the Bankruptcy Court.”

Forum has four outstanding bond issues totaling $129 million. Its debt-service reserve fund as of last year totaled $54 million, and Forum has tapped the fund to make principal payments while making interest payments with cash over the past year. All bonds were sold through Mahoning County, and are secured with a gross revenue pledge and mortgages on the system’s primary facilities.

On the bond side, secured creditors include MBIA Insurance, now known as National Public Finance Guarantee Corp,; JPMorgan Chase Bank NA, which issued a standby bond purchase agreement on debt issued in 1997; and Fifth Third Bank, which supplies a letter of credit on another bond series.

Despite its bankruptcy filing, Forum continued to make all principal and interest payments, prompting Standard & Poor’s in April to revise Forum’s outlook to stable from negative while affirming its underlying C rating.

Moody’s Investors Service rates the system Ca and maintains a negative outlook. 

For Forum’s bondholders, MBIA’s role will prove key to getting their money back, according to a bankruptcy attorney. The insurer, which has faced its own set of financial problems and the loss of its triple-A rating, insures $95 million of Forum’s $129 million of debt.

As a secured creditor, MBIA quickly objected to the proposed sale, saying Forum violated court agreements by not obtaining its consent on the purchase agreement, and that the system should pursue a reorganization plan that MBIA and other creditors filed in court in May.

“With Forum Health having spent more than a year in Chapter 11 without determining a clear exit from bankruptcy, we were reluctantly forced to file our own plan of reorganization last month,” MBIA said in an e-mail.

“Our plan allows Forum to truly reorganize so it can finally put its operational troubles to rest and focus on patient care. If a sale does not maximize value, a plan of reorganization will be Forum’s only viable means to exit bankruptcy in a timely manner.”

Under MBIA’s reorganization plan, Forum’s bondholders could opt to receive a cash payment in lieu of continuing to hold their bonds.

Bankruptcy Judge Kay Woods has scheduled a hearing for next Tuesday on the proposed sale and reorganization plan. The court will also allow time for other bidders to make their own offers for the system.

Forum officials received several phone calls from interested buyers after the Ardent announcement, according to one local report.

Buyers are attracted to providers like Forum, DMC, and Caritas despite years of financial struggles if the price is low enough and the potential for improvement is there, said Richard Ciccarone, head of municipal research at McDonnell Investment Management.

“The price has to be right to make the entity attractive,” Ciccarone said. “The buyers also have to believe that the insured health care plan will help them, have some confidence that the high median age [of patients] will have Medicare support, and some belief that the shrinkage in the area is not going to continue.”

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