Bondholder payments due in Mercy Hospital bankruptcy

The Chapter 11 bankruptcy saga of Iowa's Mercy Hospital continues, with master trustee Computershare Corporate Trust filing a notice Thursday about the distribution of cash to bondholders and a status conference on Friday yielding some progress on stalled payments.

According to an August 1 filing by Computershare Trust posted on the Municipal Securities Rulemaking Board's EMMA website, "The bondholder post-distribution cash proceeds … is expected to be distributed to the bondholders on or about August 8, 2024, in the aggregate amount of $15,609,322.55, in accordance with the bond documents." Those who are on record as bondholders as of Aug. 5 will receive the distribution.

A Chapter 11 plan that took effect June 24 says holders of the Series 2011 and Series 2018 bonds are entitled to allowed claims of up to $62.8 million, a 77% to 96% recovery rate. Other secured claims are entitled to allowed claims of up to $598,867, a 100% recovery rate, and general unsecured claims are entitled to allowed claims of up to $38.368 million, an 8% to 10% recovery rate.

University of Iowa

The bonds were issued by the city of Hills, Iowa, for Mercy Services Iowa City. The Series 2018 bonds have an outstanding balance of $34,219,897.63. The Series 2011 bonds have an outstanding balance of $24,270,000, according to the Thursday filing.

Moody's Ratings withdrew its Caa1 rating when the bankruptcy was filed. It had rated the hospital's 2011 revenue bonds A2 when they were issued. The hospital's 2018 revenue bonds were unrated.

In a July 26 petition for a status conference "regarding the undue delay in making … distributions required under the [Chapter 11] plan," bondholder representative Preston Hollow Community Capital and Computershare Trust told the court: "Although the plan has been effective for over one month, and despite the plain language requiring bondholder post-distribution cash to be distributed within five business days … the secured bondholder representatives have yet to receive a single effective date distribution."

The petition added, Mercy's management, ToneyKorf Partners, had not completed the accounting, claims reconciliation and other work necessary to administer those distributions.

"The secured bondholder representatives are concerned that the delay in transitioning assets and records to the liquidation trust is having a negative effect on values and ultimate recoveries of the trust beneficiaries," the petition reads.

In the status conference in bankruptcy court on Friday, lawyers for Preston Hollow told Judge Thad Collins that bondholders received $16 million on July 29 and $1.25 million Thursday, The Gazette reported. 

"Since we filed the request, there has been progress," attorney Megan Preusker reportedly told the judge. "It seems like the parties are working together and communicating better."

Preusker did not respond to requests for comment. Preston Hollow declined to comment, citing "ongoing bankruptcy court proceedings." 

A spokesperson for Computershare Trust said in a statement that as corporate trustee its actions are directed by the majority bondholder representative and the Master Trust agreement.

The petition for a status conference claims Mercy's cash balances increased from $28 million to $34 million as of July 17. Therefore, Preston Hollow said it believed the initial bondholder post-distribution cash amount "should not be less than $20 million."

Yet when ToneyKorf transferred the necessary records, including accounts payable information, to the liquidation trustee, attorneys for Preston Hollow said, "the amount of bondholder post-distribution cash available to distribute [was] only $10,270,437.93." They accused ToneyKorf of, among other things, creating a duplicate reserve for accounts payable.

Mark Toney, formerly chief restructuring officer for Mercy, now senior managing director of ToneyKorf, did not respond to requests for comment.

Toney said in court on Friday that the status conference was "unnecessary" and the discrepancy in bondholder post-distribution cash amounts was a "miscommunication," according to The Gazette.

The newspaper also reported that acting U.S. Trustee Mary Jensen has objected to Mercy's payment of $4.2 million in attorney's fees to the McDermott Will & Emery law firm. Mercy has reportedly paid $4.6 million to ToneyKorf.