Standard & Poor’s last week withdrew its rating on North Philadelphia Health System’s 1997A bonds after downgrading the debt to CCC from AAA.
The Federal Housing Administration insures the revenue bonds. NPHS has $19.38 million of its 1997A bonds outstanding as of Oct. 15, according to Standard & Poor’s analyst Renee Berson.
The Philadelphia Hospitals and Higher Education Facilities Authority sold $25.54 million of 1997A bonds on behalf of the health care provider.
NPHS’ mortgage payments meet its debt service obligations. If it is late with its mortgage payments, the trustee of the 1997 bonds, Bank of New York Mellon, has 30 days to file a notice to assign the mortgage to the U.S. Department of Housing and Urban Development.
According to Standard & Poor’s, BNY Mellon filed such a notice to HUD in April after the health care provider missed a February mortgage payment.
“In our view, neither the trustee nor the authority has acted in accordance with the [bond] documents,” according to a Standard & Poor’s report.
If NPHS fails to meet its payment obligations, HUD would then become the property owner and the obligor of the 1997 bonds.
“When [NPHS] stops payments, the trustee agrees to make an assignment of that mortgage note back to HUD and they basically own whatever property was assigned to them and they pay 99% of the balance that’s in default,” said Standard & Poor’s analyst Louis Louis.
Louis and Berson said the health care provider continues to make interest payments from the debt service reserve fund. The bonds have an anticipatory principal payment schedule. The next maturity date is January 2018 for $8.43 million of debt, according to the OS.
In addition, in an effort to stop BNY Mellon from filing the mortgage assignment to HUD, North Philadelphia Health System sought a temporary restraining order and preliminary injunction on Aug. 17 in the U.S. District Court for the Eastern District of Pennsylvania.
On Sept. 21, all parties agreed that the temporary restraining order would expire on Sept. 25, according to court documents.
“As a result, HUD has extended for the fifth time the recording of the assignment process without penalty through Oct. 25,” Standard & Poor’s said.
In a memorandum of law in support of its Aug. 17 filing, NPHS pointed to its strong charity care services that could be disrupted in the event of a HUD takeover.
“NPHS’ president and [chief executive officer] believes that if the threatened assignment of the mortgage from BNY Mellon to HUD occurs next week with HUD taking possession and control of NPHS, the fragile economic relationship of the NPHS hospitals with their major source of funding by the commonwealth’s Department of Public Welfare for the uncompensated care for the uninsured, indigent, and underserved (but deserving) community in north Philadelphia may be destroyed,” the memorandum stated.
NPHS president and CEO George Walmsley said he could not comment on the matter due to the pending litigation, but said that the company is no longer delinquent on its mortgage payments. In addition, BNY Mellon sent a letter to bondholders on Oct. 22, Walmsley said.
The trustee declined to comment and would not release the letter to investors to The Bond Buyer. The authority did not respond to requests for comment.
NPHS consists of two acute-care hospitals, St. Joseph’s Hospital and Girard Medical Center, in north Philadelphia. St. Joseph is a 146-bed facility and Girard has 168 beds.