SAN FRANCISCO — Voters in Riverside County, Calif., last week approved a proposal from the bankrupt Valley Health System to sell the public district's two hospitals and its other real estate assets to a for-profit group of local physicians.

If the bankruptcy court approves the deal, and the physicians' group comes up with financing, the district may be on its way to resolving its two-year old Chapter 9 bankruptcy and paying off $44.7 million of outstanding tax-exempt bond debt at par.

The district filed for bankruptcy in December 2007 after years of financial struggles and political turmoil. Its revenue bonds and certificates of participation have been below investment grade since 2001.

Bondholders' trustee U.S. Bank NA has filed motions in the case raising questions about the way the district has conducted the sale process and its ability to close the deal it has proposed.

Last week's vote was necessary under state law because the public hospital district sought to sell more than half of its assets.

More than 87% of the voters approved the deal in the low-turnout special election, with only 22% of registered voters participating.

The election last week specifically authorized a sale to the local doctors' group, Physicians for Healthy Hospitals Inc.

That group has not nailed down the financing for the $169 million transaction, according to a document Valley Health System filed in court last week, in response to the trustee's objections to its bankruptcy plan.

"As of the date hereof, PHH does not have the cash on hand or a binding financing commitment or sufficient investor commitments to obtain from a third-party lender and physician investors the cash which will be needed at closing," the document said. "However, PHH is in the process of obtaining financial commitments from investors, and has also applied for financing from financial institutions."

At least three other legal challenges to the sale — from local critics of the deal and a rival for-profit hospital operator that expressed interest in buying the hospitals — remain unresolved, according to disclosure documents VHS filed with the bankruptcy court last week.

In a news release after election results were released, Physicians for Healthy Hospitals predicted the sale would be finalized in about 90 days.

"Importantly, the sale will allow the district to repay Wall Street bondholders and finally put an end to their threats to foreclose on the hospitals," Dr. Alex Denes, a founder and spokesman of Physicians for Healthy Hospitals, said in the release.

The morning after last Tuesday's election, 1993 Valley Health System certificates of participation with a 2023 maturity traded at more than 74 cents on the dollar, up from the 50-cent range the day before, according to Municipal Securities Rulemaking Board data.

The outstanding debt in question is about $40.6 million of 1993 COPs and $4.9 million of outstanding 1996 revenue bonds.

According to disclosure documents, the trustee decided not to make the Nov. 15 interest payments on the bonds, because "the district has not made any installment payments to the trustee for the interest payments coming due."

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