LOS ANGELES — The Tulare Local Health Care District remains current on bond payments after filing for Chapter 9 bankruptcy.

Riley Walter, an attorney for the Tulare hospital board, said he doesn't know if bond investors will be included as creditors when the more complete initial bankruptcy papers are filed ahead of the status hearing.

“I don’t know if the bonds are going to be paid or included as a creditor,” said Walter, an attorney with the Walter Wilhelm Group in Fresno, Calif.

“We have talked to the attorneys for the indenture trustee and confirmed that all payments have been made and are current; but we are still trying to get specific details on the bonds," Walter said. "Those details are with the management company."

The private management company hired to run the hospital, Healthcare Conglomerate Associates, has been challenged by board members, the community and rating agencies for not adequately disclosing its financial situation.

The healthcare district had bounced paychecks and has multiple lawsuits currently pending against it for nonpayment and is in conflict with the private firm it hired to operate its Tulare Regional Medical Center.

U.S. Bankruptcy Judge Rene Lastreto was appointed to the case on Oct. 3, according to court documents.

The next step will be for the hospital board’s attorneys to file the statement of qualification to be in bankruptcy. After that the court would set a date for a hearing during which any creditor can object to the qualifications.

“We are at the very preliminary stage,” Walter said. He anticipated that the judge will schedule hearings, including one for a status conference, by the beginning of next week.

The bond trustees are not listed on the current sheet of major creditors.

Moody's Investors Service downgraded the hospital’s $84.1 million in general obligation debt to Ba3 from Ba2 Thursday, retaining its negative outlook. Moody's had dropped the bonds to Ba3 from Baa3 last week, shortly before the Sept. 30 bankruptcy filing.

“The downgrade to Ba3 with a negative outlook reflects the district’s recent filing for Chapter 9 bankruptcy,” Moody’s analysts wrote in the report.

“The rating is also based on the district’s deteriorating financial and operational performance, nonexistent cash liquidity, failure to secure financing to complete construction of a planned medical tower, dysfunctional board relations, poor reporting and oversight practices, and the possibility of closure,” Moody’s wrote.

Fitch Ratings Friday downgraded to D from CC its issuer default rating on the district, and downgraded to C from CC its rating on the district's $13,650,000 of series 2007 fixed-rate revenue bonds.

"The downgrade of the series 2007 bonds to 'C' indicates that default appears inevitable," Fitch wrote.

The 500-employee Tulare Regional Medical Center remains open.

Walter said the reason the board voted to file Chapter 9 bankruptcy was because the hospital employees had not been paid and the management company had threatened to close the hospital last week.

“If you shut a hospital down, the time and cost delays related to getting a hospital back up and running are horrendous,” Walter said.

The board was able to file bankruptcy without going through the mediation required through California’s Chapter 9 law, because it qualified for what the attorney called “the emergency off-ramp,” that requires the board to make a declaration of fiscal emergency. The board made that declaration on Friday in an emergency meeting.

“If you make that declaration, you can center Chapter 9 without going through the mediation process,” Walter said.

The board is made up of President Kevin Northcraft, Mike Jamaica and newly elected board member Senovia Gutierrez.

HCCA supporters Linda Wilbourn and Richard Torrez resigned in August and September leaving two vacancies on the board. In July, HCCA supporter Dr. Parmod Kumar was recalled from the TRMC board.

Walter said he wasn’t involved with the board when it made the decision to hire the current management company in January 2014.

“But the way I have heard it explained is that management company was hired by the prior board – and the prior board was affiliated with a director that was highly, highly controversial,” Walter said. “The management agreement was considered highly unfavorable and unfair to the district and maybe way overpriced.”

A measure to pass a $55 million bond measure in August 2016 to complete a hospital tower was defeated handily, gathering less than 43% of the vote.

“While the new management team [HCCA] initially improved operating performance in fiscal 2014 and 2015, they have failed to secure financing to complete construction on a new medical tower following voters’ failure in August 2016 to approve general obligation funding for the remainder of the project,” Moody’s analysts wrote. “As a result, the district has experienced two years of year-over-year declines in revenues and patient volumes, eroding financial performance and liquidity.”

The district is in arrears for payroll and water and electric charges and faces a number of lawsuits from vendors for delinquencies, Moody’s wrote. It also owes HCCA roughly $14 million for a working capital loan, analysts wrote.

“In combination, these factors pose serious risks to the hospital as a going concern and increase the likelihood of an eventual closure,” Moody’s analysts wrote.

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