California hospital chain can't outrun its troubles, files for Chapter 11

California's Verity Health System has filed for Chapter 11 bankruptcy, three years after a deal put the troubled nonprofit under a hedge fund's management.

The health system had $459.2 million in long term debt outstanding and $254 million of pension liabilities as of June 30, 2017, according to its comprehensive annual financial report posted on the Municipal Rulemaking Securities Board’s EMMA website.

Patrick Soon-Shiong, founder and chief executive officer of NantHealth, during the annual Milken Institute Global Conference in Beverly Hills, California, U.S., on Monday, April 27, 2015.
Patrick Soon-Shiong, founder and chief executive officer of NantHealth, during the annual Milken Institute Global Conference in Beverly Hills, California, U.S., on Monday, April 27, 2015. The conference brings together hundreds of chief executive officers, senior government officials and leading figures in the global capital markets for discussions on social, political and economic challenges. Photographer: Patrick T. Fallon/Bloomberg *** Local Caption *** Patrick Soon-Shiong

“The top priority of Verity’s board and management team is to establish a long-term sustainable path forward for our hospitals, which are of critical importance to the communities they serve,” Rich Adcock, CEO of Verity Health, said in a statement to bondholders about the bankruptcy filing posted on EMMA.

Verity said that it has secured $185 million of debtor-in-possession financing.

The filing affects Daughters of Charity Health System Series 2005A and Daughters of Charity Health System-St. Francis Medical Centers Series 2005G and 2005H bonds issued through the California Statewide Communities Development Authority, a conduit issuer. It also affects 2015 notes issued for Verity Health through the California Public Finance Authority, a conduit issuer.

In addition to the $459.2 million in long-term debt, in May 2017 Verity also closed on a Commercial Property Assessed Clean Energy funding of $40 million to finance seismic upgrades to the Seton Medical Center campus to comply with California's earthquake safety laws.

Verity has $167.6 million in principal payments due on its debt in 2019.

The original filing includes a 2,781 page list of creditors.

The company filed for bankruptcy protection in the Central District of California, Los Angeles division, to resolve cash flow problems while it searches for buyers, according to filings posted on EMMA.

A status conference has been scheduled for Dec. 11 and the trial date has been set for July 29, 2019, according to court documents.

The health system, which employs 6,000 people, will continue operations during the bankruptcy process.

The 16 affiliates associated with Verity and the six hospitals clustered in Los Angeles and the San Francisco Bay area filed associated, but separate, bankruptcy filings.

Its hospitals are St. Francis Medical Center and St. Vincent Medical Center in southern California and O’Connor Hospital, St. Louise Regional Hospital, Seton Medical Center and Seton Medical Center Coastside in northern California. Verity also runs a physician network and medical foundation that includes urgent care centers and doctor’s offices.

The Chapter 11 process may lead to the sale of some or all of the hospitals.

“We are pursuing various strategic options for each of our six hospitals, with a focus on working with potential buyers who can continue the mission of patient care at each hospital,” Adcock said in a statement. “Through the sales process, we will be putting our hospitals in a better position for long-term success.”

Sales would require approval by the bankruptcy judge and the state’s attorney general.

The 2015 agreement with BlueMountain came after Kamala Harris, California's attorney general at the time, demanded terms to approve the hospitals' agreed-upon sale to a for-profit operator that scuttled the deal.

Dentons law firm is representing the health system in the bankruptcy. It also hired Cain Brothers to act as investment bankers, Kurtzman Carson Consultants to act as claims agent and Berkeley Research Group as financial advisor in the Chapter 11 bankruptcy.

Integrity Healthcare, a company created by New York hedge fund BlueMountain Capital Management, took over management of the Daughters of Charity hospital chain in July 2015, renaming it Verity Health System.

In June 2017, billionaire Patrick Soon-Shiong's NantWorks LLC took a majority share in Integrity Health. Soon-Shiong recently purchased the Los Angeles Times.

S&P Global Ratings revised the outlook June 25 on Verity’s bonds to stable from positive maintaining the bonds at a CCC junk rating.

An S&P spokeswoman confirmed that the report is the rating agency’s most recent, adding that S&P doesn’t comment on credits between reports.

“The outlook revision reflects an operating revenue shortfall in fiscal 2017 relative to budget expectations and ongoing operating losses through the nine-month year-to-date period ended March 31, 2018,” wrote S&P Global Ratings credit analyst Melanie Her. “With an entirely new management concentrating on various system-wide initiatives to improve financial performance, we expect Verity to be able to sustain its current operations during the outlook period.”

A website has been created for interested parties to view bankruptcy documents.

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Bankruptcy Not-for-profit healthcare Revenue bonds California
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