Court will rule on U. of Iowa's winning bid for bankrupt hospital

A bankrupt Iowa hospital could ultimately end up in the hands of the University of Iowa, which submitted the winning bid in a reopened auction last week. 

A hearing on Mercy Hospital's sale to the university is scheduled for Monday in U.S. Bankruptcy Court in Cedar Rapids.

Mercy Iowa City

The Iowa City hospital, which had $62.145 million of bonds outstanding as of July 31, filed a Chapter 11 bankruptcy in August with the aim of having the university acquire substantially all of its operating facilities and key assets.

However, Preston Hollow, the hospital's biggest bondholder, along with operational partner American Health Systems, submitted the highest bid of $29 million in an auction that ended Oct. 10.

An impasse related to operating losses led the hospital to reopen the auction, with the university clarifying that its bid included a commitment to make advances to cover those losses beginning Dec. 1, according to a notice posted this week on the Municipal Securities Rulemaking Board's EMMA disclosure website by the bond trustee. Mercy rejected the bondholder's bid and on Oct. 27 declared the university's $28 million bid as the winner. 

In August, the Iowa Board of Regents originally agreed to pay $20 million for real estate and business assets in a deal under which it would not assume Mercy's debt obligations. During last week's auction, an attorney for the university said it commits to invest at least $25 million on technology and infrastructure improvements at Mercy within five years, according to a court filing. 

Mercy sold $44.6 million of health facilities revenue bonds through the city of Hills, Iowa, in 2011, followed by $41.76 million of unrated bonds in 2018 that Preston Hollow bought.

In July, Preston Hollow petitioned a state court  to appoint a receiver, claiming the hospital was in a financial freefall and unable to make debt payments, although Mercy officials denied events of default occurred. The petition was stayed with the onset of the bankruptcy case.

Moody's Investors Service, which originally rated the 2011 bonds A2 and most recently downgraded the debt to Caa3, withdrew the rating due to the bankruptcy filing.

Services provided by Mercy, which was founded in 1873, include emergency, heart, orthopedic, maternity, and cancer care, as well as general surgery. The hospital has 194 acute care beds and a medical staff of more than 250 doctors and providers and competes with the much larger University of Iowa Hospitals and Clinics in Iowa City.