After declaring its largest bondholder Preston Hollow winner of an auction for its assets last week — and issuing a news release to that effect — Mercy Iowa City now is refusing to move forward with the transaction, according to documents filed Thursday evening in U.S. Bankruptcy Court.
In the filings asking a judge to force Mercy to proceed with the sale “in accordance with the terms set forth in the winning bid at the auction,” Preston Hollow on Thursday revealed it outbid the University of Iowa’s $28 million offer with a $29 million bid — eventually deemed to be the “highest and otherwise best bid.”
That $29 million offer included a $27.8 million “credit bid“ — tapping into the more than $60 million Mercy owes Preston Hollow and master trustee Computershare — and another $1.2 million cash bid to cover ”additional operating losses incurred by the hospital between Nov. 15, 2023 and Nov. 30, 2023.“
Preston Hollow, in partnership with would-be operator American Healthcare Systems, agreed to provide additional funds for operating losses beyond Nov. 30 until the sale closed — anticipated on or before Feb. 29.
But, according to Thursday’s court filing, Mercy is maneuvering around language agreed to at the auction in an attempt to “levy a significant additional funding burden on the bondholder representative retroactively.”
The disagreement, according to Preston Hollow, “has created an impasse and (Mercy) has refused to move forward with the transaction.”
The specific debate relates to the phrase “operating losses,” which Preston Hollow said it was defining in the “ordinary” way.
“The bondholder representative understood the term ‘operating losses’ to have its ordinary meaning, i.e., the amount by which the hospital’s operating expenses exceed its available funds to pay such expenses, including available cash on-hand,” according to Preston Hollow’s Thursday petition.
Mercy, according to Preston Hollow, “never specified that they had a different intended meaning, i.e., that certain available funds should be carved out of the calculation of available cash.”
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Expounding on that carve out, Preston Hollow referenced a settlement between Mercy and its nonprofit foundation that committed the foundation to distribute its unrestricted millions to help offset “operating expenses of the hospital.”
“However, when it came time to document this agreement, (Mercy) for the first time asserted that any funds made available to them as a result of the settlement with Mercy Hospital Foundation (the “foundation”) should not be included in the calculation of ‘operating losses’ for purposes of the bondholder representative’s backstop obligation,“ according to Preston Hollow. ”In other words, the foundation’s contributions, even though expressly earmarked to ‘offset the operating expenses of the hospital,’ should be ignored as part of the operating loss calculation.“
That “nuanced” interpretation of operating losses “would have the practical effect of significantly increasing the funding burden to be borne by the bondholder representative in a manner that was not agreed to by the bondholder representative at the auction.”
And — given it’s already is taking steps to close the sale and maintain a community hospital in Iowa City — Preston Hollow said that’s a problem.
“Under (Mercy’s) formulation of the term ‘operating expenses,’ it no longer means ‘actual operating losses’ or ‘operating losses that accrue,’ as described at the auction,” according to Thursday’s filings. “Instead, according to (Mercy), the term ‘operating losses’ has a notional meaning that does not take into account foundation funds expressly made available for the payment of operating expenses.”
This came into focus Tuesday, according to Preston Hollow, when Mercy provided them a “draft operating budget” after weeks of asking.
That draft budget revealed “the creative application of the foundation’s unrestricted funds, such that none of the funds would be applied on a go-forward basis to prospective operating expenses.”
By carving out the foundation funds, Mercy effectively created a $3.5 million pool for attorneys fees and inflated operating losses exceeding $15 million — just as Mercy’s attorneys over the last 10 days have asked the court to approve payments nearing $1 million just for the month of August.
www.thegazette.com
In the filings asking a judge to force Mercy to proceed with the sale “in accordance with the terms set forth in the winning bid at the auction,” Preston Hollow on Thursday revealed it outbid the University of Iowa’s $28 million offer with a $29 million bid — eventually deemed to be the “highest and otherwise best bid.”
That $29 million offer included a $27.8 million “credit bid“ — tapping into the more than $60 million Mercy owes Preston Hollow and master trustee Computershare — and another $1.2 million cash bid to cover ”additional operating losses incurred by the hospital between Nov. 15, 2023 and Nov. 30, 2023.“
Preston Hollow, in partnership with would-be operator American Healthcare Systems, agreed to provide additional funds for operating losses beyond Nov. 30 until the sale closed — anticipated on or before Feb. 29.
But, according to Thursday’s court filing, Mercy is maneuvering around language agreed to at the auction in an attempt to “levy a significant additional funding burden on the bondholder representative retroactively.”
The disagreement, according to Preston Hollow, “has created an impasse and (Mercy) has refused to move forward with the transaction.”
The specific debate relates to the phrase “operating losses,” which Preston Hollow said it was defining in the “ordinary” way.
“The bondholder representative understood the term ‘operating losses’ to have its ordinary meaning, i.e., the amount by which the hospital’s operating expenses exceed its available funds to pay such expenses, including available cash on-hand,” according to Preston Hollow’s Thursday petition.
Mercy, according to Preston Hollow, “never specified that they had a different intended meaning, i.e., that certain available funds should be carved out of the calculation of available cash.”
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Expounding on that carve out, Preston Hollow referenced a settlement between Mercy and its nonprofit foundation that committed the foundation to distribute its unrestricted millions to help offset “operating expenses of the hospital.”
“However, when it came time to document this agreement, (Mercy) for the first time asserted that any funds made available to them as a result of the settlement with Mercy Hospital Foundation (the “foundation”) should not be included in the calculation of ‘operating losses’ for purposes of the bondholder representative’s backstop obligation,“ according to Preston Hollow. ”In other words, the foundation’s contributions, even though expressly earmarked to ‘offset the operating expenses of the hospital,’ should be ignored as part of the operating loss calculation.“
That “nuanced” interpretation of operating losses “would have the practical effect of significantly increasing the funding burden to be borne by the bondholder representative in a manner that was not agreed to by the bondholder representative at the auction.”
And — given it’s already is taking steps to close the sale and maintain a community hospital in Iowa City — Preston Hollow said that’s a problem.
“Under (Mercy’s) formulation of the term ‘operating expenses,’ it no longer means ‘actual operating losses’ or ‘operating losses that accrue,’ as described at the auction,” according to Thursday’s filings. “Instead, according to (Mercy), the term ‘operating losses’ has a notional meaning that does not take into account foundation funds expressly made available for the payment of operating expenses.”
This came into focus Tuesday, according to Preston Hollow, when Mercy provided them a “draft operating budget” after weeks of asking.
That draft budget revealed “the creative application of the foundation’s unrestricted funds, such that none of the funds would be applied on a go-forward basis to prospective operating expenses.”
By carving out the foundation funds, Mercy effectively created a $3.5 million pool for attorneys fees and inflated operating losses exceeding $15 million — just as Mercy’s attorneys over the last 10 days have asked the court to approve payments nearing $1 million just for the month of August.
Mercy Iowa City at ‘impasse’ with auction winner for its assets
After declaring its largest bondholder Preston Hollow winner of an auction for its assets last week -- and issuing a press release to that effect -- Mercy Iowa City now is refusing to move forward with the transaction, according to documents filed Thursday evening in U.S. Bankruptcy Court.
www.thegazette.com
