CHICAGO — Bondholders owed more than $50 million by an Indiana hospital in receivership would receive a mere $3 million or less under a proposed sale of the facility’s most valuable assets.

Madison Center Inc., a mental health and chemical dependency facility located on a 40-acre campus near downtown South Bend, has struggled with mounting financial problems that last October led the state to appoint a receiver.

The hospital defaulted on two recent debt payments after draining its debt-service reserve fund last year.

Another South Bend health care provider, Memorial Hospital, announced this week an agreement under which it would pay up to $3 million for Madison Center’s three operating buildings and inpatient operations, with net proceeds going to bondholders.

Bondholders would also be in line for net proceeds from the sale of the campus’ remaining seven vacant buildings and eight lots, as well as accounts payable and any legal actions or rights that Madison Center might have against third parties, according to Paul Ricotta, an attorney with Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC, which is representing bond trustee UMB Bank.

“This is the first step in the total collection and liquidation of the assets that secure the bonds,” Ricotta said. “This is an important step because of the assets that are remaining, these are actually operating, and so it was important to make sure that the inpatient business was handled properly not only for the maximum benefit for the bondholders but for the patients who are still there.”

It’s not certain how much the remaining assets are worth.

A hearing with St. Joseph Circuit Court Judge Michael Gotsch is scheduled for Monday, at which the trustee will ask the judge to impose a March 25 deadline to  solicit higher bids that, if they are received, would mean an auction to win the highest price.

“It’s not absolutely assured that Memorial will even be the buyer and it’s not assured that the price will only be $3 million,” Ricotta said.

UMB hired Mintz Levin last May as the hospital’s financial troubles grew.

“About three months after we got involved, we realized that the situation had deteriorated and we pushed for and received a receiver to take over,” Ricotta said.

The receiver, Michael Lane from Navigant Capital Advisors, began heavily marketing the hospital and on March 1 announced a tentative sale agreement with Memorial Hospital.

Madison Center has $50 million of outstanding debt originally issued in 1995, 1999, and 2005. The St. Joseph County Hospital Authority was conduit issuer on the sales.

A block of the 1999 debt with a 2024 maturity was yielding 20.1% in early February trading.

Standard & Poor’s cut its rating to CCC from BB-plus on the hospital last September amid severely weakened operations that analysts said was due in part to a sharp and unexpected drop in state funding.

The agency withdrew its ratings in early February when analysts were unable to reach hospital officials to obtain sufficient fiscal information.

“There are certainly not many groups raising their hand to protect this crucial community resource,” Memorial board member Tom Cassady said in a statement. “Our board of trustees and our leadership team are proud to have Memorial once again step forward to protect the health of our community.”

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