SAN FRANCISCO — A special election Tuesday may hasten the end of Valley Health System’s two-year-old Chapter 9 bankruptcy case and lead to the redemption of the Southern California public hospital district’s outstanding tax-exempt bonds.
Voters in the Riverside County district will be asked to approve the sale of its two remaining hospitals to a consortium of local physicians.
The vote is required under California law because the district wants to sell more than half of its assets.
If voters approve the $169 million sale, the bankruptcy court also approves, and the deal closes, proceeds would be used to pay off $44.7 million of outstanding tax-exempt bond debt, according to the proposed plan of adjustment filed by the hospital district.
A hearing is scheduled on that plan Thursday at the U.S. Bankruptcy Court for the Central District of California in Riverside.
It’s not a given that voters will approve the plan. They have a history of saying “no” to what the district wants.
Valley Health has struggled financially for years amid a toxic political environment exemplified by the 2001 recall election that removed four of the district’s seven elected board members from office.
In 2005, the district asked voters for a $485 million general obligation bond measure that, in addition to financing new construction, would have paid off what was then about $80 million in bond debt backed by hospital revenue.
The measure fell short of the required two-thirds majority.
In 2007, the district’s board asked voters to sell all three of the hospitals it operated at the time, only to lose by a 54% to 46% margin.
A little more than five weeks after the election, on Dec. 13, 2007, the district filed for Chapter 9 bankruptcy.
During 2008, Valley Health proceeded to sell its smallest hospital in a deal that did not require voter approval and paid off about $39 million of its outstanding debt.
If voters reject the deal this time, the physicians’ group has agreed to buy the smaller of the district’s two hospitals, Menifee Valley Medical Center.
That transaction would leave the district with its largest hospital, Hemet Valley Medical Center, and would not require voter approval.
But the “alternative transaction,” as Valley Health System describes it in its proposed adjustment plan, would only generate a $29 million purchase price.
That will not be enough to pay off the outstanding debt, and the hospital district’s adjustment plan calls for it to “obtain modifications of the $15-$18 million of debt owing on the bonds that would not be paid off by use of the $29 million purchase price.”
In court filings, U.S. Bank NA, indenture trustee for the bondholders, has been critical of the way Valley Health System has attempted to conduct its business and the sale process.
In August, U.S. Bank sought an “adequate protection” order that, among other things, would have granted the trustee a lien on the district’s property.
In October, U.S. Bankruptcy Judge Peter Carroll denied the motion.
In its brief, the trustee noted that the district had just hired a new consulting firm, the Piera Group, and named a new board chair.
“These actions, to the extent beneficial, should have been undertaken a year ago,” U.S. Bank argued. “To do so now at this late stage — as the district faces financial failure — is akin to rearranging deck chairs on the Titanic.”
U.S. Bank also criticized the district’s sale process, because it eschewed an open sale process for its agreement with the local doctors’ group, Physicians for Healthy Hospitals, or PHH.
“The indenture trustee is advised that there are established health care providers interested in pursuing a potential acquisition of the district’s assets, but those parties have been effectively shut out of the process while PHH enjoys the inside(r) track.”
Indeed, a for-profit hospital group, Prime Healthcare Services Inc., and some citizens in the Valley Health System district have inserted themselves into the process by seeking permission to file a state court case challenging the sale process on state environmental law grounds.
The bankruptcy judge has denied them permission to pursue that lawsuit, and they have filed a notice of appeal to the district court.
According to bankruptcy documents, the outstanding debt in question is about $40.6 million of 1993 Valley Health System certificates of participation and $4.9 million of outstanding 1996 revenue bonds.
According to disclosure documents, the trustee decided not to make the Nov. 15 interest payments on the bonds, because “the district has not made any installment payments to the trustee for the interest payments coming due.”
The district’s bankruptcy attorney did not respond to a telephone call seeking comment.
The bonds have carried below-investment-grade ratings since 2001.
In September, Fitch Ratings downgraded Valley Health System’s debt to C from CC and placed it on negative watch. Standard & Poor’s gives it a C rating with a developing outlook.
Bond traders don’t appear very optimistic. Valley Health System debt traded fairly actively in the 50-cent range through November, according to Municipal Securities Rulemaking Board data.