Under proposed revisions to bankruptcy procedures for the sale of Mercy Iowa City, the 150-year-old community hospital might not remain a health care facility, might not go for $20 million, won’t give the University of Iowa the “bid protections” it once offered for the purchase and won’t be completed this month.
Responding to arguments that aspects of its initial procedures could deter alternate bidders from competing with the UI’s proposed “low purchase price” of $20 million, Mercy has agreed to change some of its requested rules — including one requiring bidders to “continue operating the project as a hospital.”
“The initial proposed bidding procedures would have required any qualifying bidder to commit to continue operating the project as a hospital, which would have prevented other types of bidders, including real estate developers, from participating,” according to an objection filed by Mercy’s largest bondholder, Preston Hollow Community Capital, and master trustee Computershare Trust Company, to whom Mercy owes a combined $63 million in outstanding secured debt.
“The fundamental purpose of bidding procedures in the bankruptcy context is to maximize the proceeds received by the estate for the benefit of creditors,” according to the bondholders’ objection. “The assets should be broadly marketed for a variety of potential uses, not just as a continuation of (Mercy’s) existing health care facilities.”
While initial procedures that Mercy on Aug. 9 asked a bankruptcy judge to approve required competing bidders to show health care experience in owning or operating comparable facilities, discussions since then have persuaded Mercy to instead simply request information from a bidder if it has health care licensure or “contemplates the ongoing operations of the hospital,” court records made public Monday show.
A bankruptcy hearing to consider this and other issues is set for 10:30 a.m. Wednesday.
Preston Hollow and Computershare also made evident plans to “exercise their right to credit bid” — a move that could force the UI, if it wants to compete for Mercy’s assets, to pay significantly more than the $20 million it initially offered as “stalking horse bidder.”
Credit bidding essentially lets secured creditors bid the debt that a debtor owes them in an auction for the assets. In this case, that would allow Preston Hollow and Computershare to bid on Mercy using the $63 million owed to them. The winning bidder would own Mercy’s assets, free of any of the hospital’s current debt, allowing the bidder then to search for a new operator or to sell the assets.
“Given the extremely depressed value of the stalking horse bid, the secured bondholder representatives intend to exercise their right to credit bid,” according to court documents filed by Preston Hollow and Computershare.
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Mercy, however, is trying to discourage Preston Hollow and Computershare from doing so by using their desire to be considered a “consultation party” — which would make the pair privy to certain information about incoming bids, for example.
Making their case to the bankruptcy judge for consultation-party status, Preston Hollow and Computershare have argued, “Given that the purchase price under the (UI purchase agreement) is well below the value of the secured bondholder representatives’ secured claim, the secured bondholder representatives are keenly interested — more so than any other constituent in the case — in ensuring that the highest and best price for the assets is achieved.”
Mercy, in its new proposed sale procedures, commits to include the bondholders among its “consultation parties” — so long as they promise in writing not to “submit a bid or credit bid for the assets or otherwise actively participate in the auction.”
The bondholders have pushed back, saying Mercy’s proposed procedures “include caveats and limitations that could effectively abrogate” its right to credit bid.
As part of the two sides’ negotiations, Mercy agreed to work into its revised procedures a clause allowing credit bidding so long as the bondholders provide notice and a 10 percent deposit. But Mercy also would reserve the right to “challenge the validity, extent or priority of the liens and security interests relating to the alleged claim underlying any credit bid or otherwise object to any credit bid.”
In its original bid procedures, Mercy repeatedly characterized the proposals as “designed to promote a competitive and efficient sale process” aimed at “generating the best value for the assets.” But the bondholders disagree.
Their specific concerns relate to a “deficient manner in which the marketing process was conducted” before Mercy filed for bankruptcy Aug. 7; Mercy’s acceptance of a “below-market stalking horse bid” from the UI on the eve of the bankruptcy “without contacting any other potential purchasers who may have been willing to offer a higher price with less onerous bid protections”; and Mercy’s acquiescence to the $20 million offer “without even obtaining an appraisal, let alone a going concern valuation, of the real estate and hospital assets.”
Their objection noted Mercy has listed the net book value of its real estate at about $30 million, while “it has been reported that the actual value of (Mercy’s) real estate assets may exceed $137 million.”
Mercy, in its original proposal, reported going to lengths to solicit qualified bids — even having “already undergone a substantial marketing effort.” But Preston Hollow and Computershare in their objection reported Mercy incentivized marketing only to prospects that would continue its mission as a health care facility.
The bondholders said a proposed timeline setting a Sept. 19 bid deadline is rushed and would favor the UI, and “unlikely to produce the highest and best offer.”
However, “the (bondholders) are cognizant that there is a cash burn associated with extending the sale process,” according to their objection, urging Mercy to tap into the nearly $10 million available in its nonprofit Mercy Foundation.
Mercy “has agreed to extend the bid deadline to Oct. 2,” court documents show. That would move a potential auction to Oct. 4 and a sale hearing to Oct. 10.
The bondholders also persuaded Mercy to eliminate its proposed UI bid protections and offer only a “breakup fee” should the university lose its bid for the hospital assets.
Instead of offering a 4 percent breakup fee, plus coverage of its expenses up to $400,000 — which would have required a competitor to top $21.3 million to outbid the university — the UI under the revised rules will receive just the fee, putting the amount to top its $20 million offer at $20.9 million instead.
“The (bondholders) believe that the proposed 6 percent bid protections are likely to hamper, rather than encourage, competitive bidding, and do not support them.”
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Responding to arguments that aspects of its initial procedures could deter alternate bidders from competing with the UI’s proposed “low purchase price” of $20 million, Mercy has agreed to change some of its requested rules — including one requiring bidders to “continue operating the project as a hospital.”
“The initial proposed bidding procedures would have required any qualifying bidder to commit to continue operating the project as a hospital, which would have prevented other types of bidders, including real estate developers, from participating,” according to an objection filed by Mercy’s largest bondholder, Preston Hollow Community Capital, and master trustee Computershare Trust Company, to whom Mercy owes a combined $63 million in outstanding secured debt.
“The fundamental purpose of bidding procedures in the bankruptcy context is to maximize the proceeds received by the estate for the benefit of creditors,” according to the bondholders’ objection. “The assets should be broadly marketed for a variety of potential uses, not just as a continuation of (Mercy’s) existing health care facilities.”
While initial procedures that Mercy on Aug. 9 asked a bankruptcy judge to approve required competing bidders to show health care experience in owning or operating comparable facilities, discussions since then have persuaded Mercy to instead simply request information from a bidder if it has health care licensure or “contemplates the ongoing operations of the hospital,” court records made public Monday show.
A bankruptcy hearing to consider this and other issues is set for 10:30 a.m. Wednesday.
Sale price
Preston Hollow and Computershare also made evident plans to “exercise their right to credit bid” — a move that could force the UI, if it wants to compete for Mercy’s assets, to pay significantly more than the $20 million it initially offered as “stalking horse bidder.”
Credit bidding essentially lets secured creditors bid the debt that a debtor owes them in an auction for the assets. In this case, that would allow Preston Hollow and Computershare to bid on Mercy using the $63 million owed to them. The winning bidder would own Mercy’s assets, free of any of the hospital’s current debt, allowing the bidder then to search for a new operator or to sell the assets.
“Given the extremely depressed value of the stalking horse bid, the secured bondholder representatives intend to exercise their right to credit bid,” according to court documents filed by Preston Hollow and Computershare.
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Mercy, however, is trying to discourage Preston Hollow and Computershare from doing so by using their desire to be considered a “consultation party” — which would make the pair privy to certain information about incoming bids, for example.
Making their case to the bankruptcy judge for consultation-party status, Preston Hollow and Computershare have argued, “Given that the purchase price under the (UI purchase agreement) is well below the value of the secured bondholder representatives’ secured claim, the secured bondholder representatives are keenly interested — more so than any other constituent in the case — in ensuring that the highest and best price for the assets is achieved.”
Mercy, in its new proposed sale procedures, commits to include the bondholders among its “consultation parties” — so long as they promise in writing not to “submit a bid or credit bid for the assets or otherwise actively participate in the auction.”
The bondholders have pushed back, saying Mercy’s proposed procedures “include caveats and limitations that could effectively abrogate” its right to credit bid.
As part of the two sides’ negotiations, Mercy agreed to work into its revised procedures a clause allowing credit bidding so long as the bondholders provide notice and a 10 percent deposit. But Mercy also would reserve the right to “challenge the validity, extent or priority of the liens and security interests relating to the alleged claim underlying any credit bid or otherwise object to any credit bid.”
Timeline
In its original bid procedures, Mercy repeatedly characterized the proposals as “designed to promote a competitive and efficient sale process” aimed at “generating the best value for the assets.” But the bondholders disagree.
Their specific concerns relate to a “deficient manner in which the marketing process was conducted” before Mercy filed for bankruptcy Aug. 7; Mercy’s acceptance of a “below-market stalking horse bid” from the UI on the eve of the bankruptcy “without contacting any other potential purchasers who may have been willing to offer a higher price with less onerous bid protections”; and Mercy’s acquiescence to the $20 million offer “without even obtaining an appraisal, let alone a going concern valuation, of the real estate and hospital assets.”
Their objection noted Mercy has listed the net book value of its real estate at about $30 million, while “it has been reported that the actual value of (Mercy’s) real estate assets may exceed $137 million.”
Mercy, in its original proposal, reported going to lengths to solicit qualified bids — even having “already undergone a substantial marketing effort.” But Preston Hollow and Computershare in their objection reported Mercy incentivized marketing only to prospects that would continue its mission as a health care facility.
The bondholders said a proposed timeline setting a Sept. 19 bid deadline is rushed and would favor the UI, and “unlikely to produce the highest and best offer.”
However, “the (bondholders) are cognizant that there is a cash burn associated with extending the sale process,” according to their objection, urging Mercy to tap into the nearly $10 million available in its nonprofit Mercy Foundation.
Mercy “has agreed to extend the bid deadline to Oct. 2,” court documents show. That would move a potential auction to Oct. 4 and a sale hearing to Oct. 10.
Bid protections
The bondholders also persuaded Mercy to eliminate its proposed UI bid protections and offer only a “breakup fee” should the university lose its bid for the hospital assets.
Instead of offering a 4 percent breakup fee, plus coverage of its expenses up to $400,000 — which would have required a competitor to top $21.3 million to outbid the university — the UI under the revised rules will receive just the fee, putting the amount to top its $20 million offer at $20.9 million instead.
“The (bondholders) believe that the proposed 6 percent bid protections are likely to hamper, rather than encourage, competitive bidding, and do not support them.”
Proposal: Mercy I.C. could become something other than hospital
Under revisions to proposed procedures for the historic sale of Mercy Iowa City, the 150-year-old community hospital might not remain a health care facility, might not go for $20 million, won’t give the University of Iowa the “bid protections” it once offered, and won’t complete the sale this month.
www.thegazette.com
