CHICAGO - Just days after closing its doors and preparing for liquidation, officials at a bankrupt Pontiac, Mich.-based hospital that has defaulted on bond payments twice this year said a deal to sell the facility remains possible if prospective buyers can secure financing.
The move would mean the difference between investors collecting $3.2 million on $38 million of outstanding bonds and collecting little to nothing if the health care provider heads straight into liquidation. The bonds were sold through a conduit issuer, the Pontiac Hospital Finance Authority.
The North Oakland Medical Center closed its doors Tuesday and suspended patient operations after a long-planned deal to sell itself to a private, for-profit physician's group fell through when the buyer could not secure financing.
The closure indicated that the hospital, which filed for federal Chapter 11 bankruptcy in August, would instead file for Chapter 7 bankruptcy to liquidate its assets, leaving unsecured bondholders near the very bottom of a long list of creditors. Under its Chapter 11 plan, the facility planned to reorganize and then sell itself to the for-profit physician's group.
Located in the struggling city of Pontiac, NOMC is one of three hospitals in the area that have been grappling with fiscal problems in part because of a weak economy in an area that rating analysts said is already "over-bedded."
In a sign of the hospital's growing financial stress, it defaulted on two scheduled bond payments in January and April this year. It's not known if it made a scheduled Oct. 15 payment to the bond trustee US Bank NA. A material event notice on Oct. 15 from the trustee said the hospital failed to make required installment payments and remains in default.
But even as NOMC prepared to begin liquidation, the possibility of a sale was revived yesterday when the buyers appeared closer to securing financing, according to chief financial officer Mike DeRubeis.
"As of today, new developments are such that a completion of a sale is back on the table," DeRubeis said. "It would appear that the financing is going to come together, though I'm not going to handicap it."
If the sale goes through, the terms of the deal would remain largely the same as outlined earlier this summer, DeRubeis said. The for-profit Oakland Physicians Medical Center LLC would pay $8.5 million for the facility, and bondholders would receive roughly $3.26 million of that, according to notices from US Bank.
Bondholders would also retain claims to share in any distributions available for NOMC creditors in bankruptcy proceedings, though those claims would likely be "relatively small in relation to the outstanding balance due on the bonds," according to an Oct. 15 bondholder notice from the trustee.
The $3.2 million would come on top of roughly $3 million from debt service reserve funds that US Bank distributed to bondholders in June.
A majority of bondholders had agreed to the tentative sale deal as of September.
"The bondholders have very much been part of the process since the beginning, and they've been very helpful and continue to be engaged," DeRubeis said.
DeRubeis said he expects resolution during the next couple days. NOMC will begin Chapter 7 liquidation proceedings if the sale falls through, he said.
In that case, bondholders are likely to get little to nothing, said a veteran tax-exempt bankruptcy attorney. The bonds are an unsecured general obligation of the medical center and are not secured by a lien on or security interest in any property of the authority or the hospital, according to original bond documents issued in 1993.
As unsecured creditors, "they aren't going to get anything," the bankruptcy attorney said.
"Less than 10% of Chapter 7s pay anything, and on those that do, the average dividend is less than eight cents on the unsecured dollar," the attorney said. "Even in the happy event they get something, they're not going to get very much."
Officials listed the hospital's total debts as more than $100 million in bankruptcy filings in September. The $38 million bond debt was one of the main stumbling blocks in finding a new owner, DeRubeis said.
The hospital's defaults earlier this year, on Jan. 15 and April 15, prompted downgrades by Standard & Poor's and Moody's Investors Service to D and C, respectively.
