The Landmark Medical Center in Woonsocket, R.I., defaulted on scheduled interest and principal payments on bonds maturing this month, triggering a payment by its insurer, according to a notice posted last week by its trustee.
Radian Asset Assurance Inc. confirmed that it paid out $381,733 to make up for a deficiency in funds held by the trustee, U.S. Bank.
The nonprofit health care provider sold $14.1 million of bonds through the Rhode Island Health and Education Corp. in 2005 to refund bonds issued in 1993. Last year, the financially troubled institution entered into special mastership proceedings, which is similar, under Rhode Island law, to a reorganization under federal Chapter 11 bankruptcy.
“There was a debt-service reserve fund that paid debt service for last year. The payments that were due on Oct. 1 — there was some shortfall, so some of it came from the reserve fund and some of it came from Radian,” said Normand Benoit, partner at Partridge Snow & Hahn LLP, bond counsel to the issuer. “Could they have made up the shortfall? Perhaps. The special master chose not to do that at the moment.”
Questions to court-appointed special master Jonathan Savage of Shechtman Halperin Savage LLP were referred to a colleague at the firm who did not returns calls on Friday.
The obligor was due to pay $1.1 million of principal and interest owed bondholders on Oct. 1 but did not, and funds held by the trustee available for payment totaled $679,524, according to disclosure filings.
Last month Rhode Island Superior Court Judge Michael Silverstein approved a proposal by Landmark to negotiate a merger with Caritas Christi Health Care, a Boston-based Catholic health care organization that operates six hospitals and other health care services in New England.
Caritas spokeswoman Teresa Prego said the organization began a due-diligence process two weeks ago to determine the financial viability of a possible merger, while adding that a decision had not been made on whether to proceed.
“I’m sure all of the financials are being factored in,” Prego said. The due-diligence process should take six to eight weeks to complete, she said.
Calls to Landmark were referred to an outside spokesman who did not respond by press time.
Bondholders have a secured claim to Landmark’s real estate, which means that any merger or acquisition would have to deal with that claim, Benoit said.
“That mortgage would have to be dealt with,” hesaid. “Bottom line is, perhaps something will be negotiated, but it’s unclear what or when.”
The bonds were issued as serials with maturities out to 2019, according to the official statement. The medical center had a modest surplus of $105,694 the year it sold the bonds, but has been in the red ever since, according to disclosure filings. The hospital expected a $6.1 million deficit in 2008, according to preliminary audited financial statements.
Landmark was formed in 1988 by the consolidation of Woonsocket Hospital and John E. Fogarty Memorial Hospital. The medical center’s debt-service coverage was covenanted at 1.1 times but it fell to an estimated negative 1.04 times last year from 1.61 times in 2005, according to disclosure documents.
The Providence Journal reported that the economic downturn had hurt the hospital, which serves a high percentage of poor and elderly people, and that it had no endowment to cushion it.
The economic downturn has hit Rhode Island hard. revenue for the first quarter of fiscal 2010 came in $30.2 million below estimates, the state reported last week. Preliminary estimates released this month put the state’s revenue at $100 million below what was projected when it passed its $7.8 budget in June.
The bonds are unrated. Radian is rated BBB-minus by Standard & Poor’s and Ba1 by Moody’s Investors Service.