LOS ANGELES — California’s Sierra Kings Healthcare District is nearing a deal that could lead to its exit from Chapter 9 bankruptcy.
The small public hospital district, located in the Central Valley near Fresno, will ask voters in June to allow it to lease its facilities and sell other assets to Roseville-based Adventist Health, which would take over operations.
The district, comprised of a hospital and five clinics in Reedley, filed for bankruptcy in October 2009 after discovering management had spent $1.7 million of bond funds on operating expenses and misspent other funds. The district collects taxes to pay for voter-approved general obligation bonds.
Sandy Haskins, interim chief executive of the district, said that once the agreement with Adventist is finalized, Sierra Kings plans to submit its exit plan to the bankruptcy court.
“Once we know what the financial underpinnings of the transaction are, then we can start working on how that fits into the [bankruptcy] plan,” Haskins said. “Hopefully, that will be in the next 30 days.”
If the deal is approved, Haskins said it could result in the defeasance or retirement of the district’s revenue bonds. The district’s taxes would still be collected to pay debt service on its GO debt.
Sierra Kings had $34 million of outstanding debt as of the June 30, which includes $6.5 million of revenue bonds.
The U.S. Bankruptcy Court for the Eastern District of California has already protected the health care district’s GO bonds from the bankruptcy process.
The bankruptcy judge recently ruled that the voter-approved property tax pledge securing the GO bonds qualifies as both a “special revenue pledge” and a “statutory lien.” Thus, the property tax levy, collections, and payments for the district’s GO debt service cannot be disrupted by the bankruptcy proceedings.
Following the ruling, Moody’s Investors Service upgraded Sierra Kings’ GO rating to Baa3 from Ba2 with a stable outlook. Standard & Poor’s rates the district’s GOs C, also with a stable outlook. Its revenue bonds were issued without ratings in 2006.
So far this year, the district has been operating at a small loss. Haskins said its operating loss was $206,000 in the eight months through the end of February.
However, Sierra Kings still needs to get approval from the bankruptcy judge, its board, Adventist’s board and from district voters to move forward on the deal.
Christine Pickering, a spokeswoman for the Adventist division that operates three hospitals and 18 clinics in the Central Valley, said the health care provider is still compiling its valuation of the deal.
“The community polling has been favorable,” Pickering said. “We would not want to come in if they weren’t supportive.”
She said Adventist, a nonprofit with religious ties, specializes in providing health care services in smaller communicates such as the Sierra Kings district.
Adventist’s network includes 17 hospitals in Hawaii, Washington, Oregon, and California. As of the end of September, Adventist Health had $921 million of outstanding long-term debt — $244 million of variable-rate debt and $677 of fixed-rate debt.
Adventist had a net operating income of $55 million out of $1.8 billion of unrestricted revenues, gains, and support through the nine months ending Sept. 30.