CHICAGO - Pontiac, Mich., approved a measure last week that paves the way for a financially strapped hospital that defaulted on recent payments owed to the trustee on $38 million of outstanding bonds to move forward with plans to file for bankruptcy and enter into negotiations with a for-profit physicians' group interested in acquiring the facility.
The Pontiac City Council last week approved the North Oakland Medical Center's long-sought request only days before the hospital said it would be forced to file for Chapter 7 liquidation proceedings. The approval moves the facility closer to severing its costly lease with the city and the Pontiac Hospital Finance Authority after years of mounting operating losses.
Under the measure, the facility would be allowed to file for federal Chapter 11 bankruptcy and reorganize and then to begin to negotiate a purchase agreement with the for-profit Oakland Physicians Medical Center LLC.
Located in a depressed town that ratings analysts say is already "over-bedded" with three hospitals, the 377-bed North Oakland Medical Center reported a loss of $12.3 million in fiscal 2007. At the end of the year, the hospital held only $4.6 million in unrestricted cash, which is equal to 18 days cash on hand. The 2007 losses are part of a larger fiscal crunch - between 2001 and 2005 the hospital lost a total of $20 million on operations.
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 bond trustee US Bank NA. The bank uses the payments due from the hospital in January, April, and October to cover annual debt service payment - totaling $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 a trustee notice. That notice indicates that $3.2 million remains in the reserve and the trustee holds another $484,000 in other funds. The hospital owes $3.76 million in debt service next year, according to the final official statement.
The remaining $38 million in debt owed by the hospital has proved to be a main stumbling block in sale attempts, according to chief financial officer Michael DeRubeis.
"We haven't been able to find any hospital in southeast Michigan, or anywhere else, who has wanted to assume the debt," he said.
Since missing its payments, hospital officials have held monthly conference calls with bondholders, according to DeRubeis and last week the hospital's chief executive officer John Graham told the City Council that bondholders have approved the "process" of negotiations so far, and would ultimately have a say in any final purchase deal, according to local media reports. The hospital's bond counsel is James Hughes of Michigan-based Butzel Long.
The $38 million debt owed by the facility is what remains from a $51.8 million hospital revenue bond issue sold in 1993. The Pontiac Hospital Finance Authority issued the bonds, which are an unsecured general obligation of the medical center, according to the 1993 official statement.
Payments are made under a lease agreement between the authority - which owns the building - and the medical center. The bonds are not secured by a lien on or security interest in any property of the authority or the hospital, so it's unclear how much bondholders would recoup in a Chapter 11 filing.
Contributing to the hospital's fiscal pressures is a $1 million annual lease payment it makes to the city. The hospital has unsuccessfully tried to renegotiate the lease. Last year the hospital paid only $600,000 of that $1 million payment - and said it did not expect to be able to make full payments in the future.
The hospital's payment defaults prompted downgrades by Standard & Poor's and Moody's Investors Service in late March to a level of D and C, respectively.
Also last week, the Pontiac City Council approved a measure that would allow the city to begin negotiations on the sale for $20 million of the Silverdome - until 2002 the home to the National Football League's Detroit Lions - to a private developer who wants to build a casino and race track on the site. The sale would allow the city to plug its projected $8 million deficit and perhaps escape a possible state takeover.
Pontiac is located in southeastern Michigan, between Flint and Detroit.