DALLAS -- El Paso Children's Hospital's controversial bankruptcy filing has led to board resignations, the threat of a rating downgrade, and recriminations from county officials.
Through it all, $120 million of bonds issued in 2008 to build the Texas region's only children's hospital appear well secured by a tax-backed general obligation pledge.
The bonds are at the heart of a legal battle over control of Children's, but so far bondholders appear untouched by the non-profit's May 19 Chapter 11 filing. As of May 22, the El Paso County Hospital District, which issued the debt, had not posted a material event notice about the bankruptcy.
Michael Nunez, chief financial officer for University Medical Center, the district's public hospital, said that bondholders should not be affected by the bankruptcy because of the general obligation pledge for the debt. He said the hospital's financial advisor First Southwest Co. told him that a material event disclosure was probably not needed unless the bankruptcy resulted in a rating change.
El Paso County Judge Veronica Escobar, who led the fight for Children's Hospital bonds as county commissioner in 2007, said bondholders should not be affected. She is worried that Children's will be sold out of bankruptcy to another entity.
Standard & Poor's placed its A-plus rating on the hospital district on watch for a possible downgrade on May 21 due to the Chapter 11 filing. The district already had a negative outlook after S&P downgraded its $251 million of debt Dec. 14.
The rating pressure comes as UMC seeks to take control of Children's a year after Children's stopped making lease payments to UMC.
"While UMC is not officially listed as a creditor in the bankruptcy filing, based on its recent interim reports, it is estimated that Children's Hospital owes UMC roughly $97 million," S&P analyst Brian Marshall said.
The amount Children's owes to UMC is a point of contention in a lawsuit that accompanied the bankruptcy filing.
According to the lawsuit, Children's maintains UMC overcharged it for its lease and services. The $120.1 million of general obligation bonds approved by voters in 2007 should have financed Children's facilities, the suit claims.
"The lease heaps such overpriced rental obligations on to [Children's] despite the fact that the facility represents [Children's] portion of the hospital premises that was fully funded by $120.1 million in public bond proceeds," the suit states.
In mediation that preceded the May 19 bankruptcy filing, the two hospitals agreed that Children's would owe UMC $49.3 million and that the remainder would be considered a capital contribution. In return, UMC would take control of Children's.
On May 18, UMC issued a press release announcing that its board had approved an agreement and praising the Children's board for working out a deal. The next day, Children's filed for Chapter 11 in Austin, announcing it could not allow UMC to take over its operations because of their specialized focus.
In its lawsuit against UMC, Children's said that UMC had previously threatened to cut off vital services that ran the gamut of virtually all of Children's operations. The suit sought a court injunction against any such moves. Moreover, the suit described Children's as being over a barrel from its first days of operation.
"On or about Feb. 10, 2012 -- four days prior to [Children's] opening its doors to patients -- UMC presented [Children's] with a multitude of agreements that document and govern the relationship," the suit said.
"Since at least mid-April of 2014, [Children's] has had material losses and has been suffering from a lack of liquidity," the suit said. "[Children's] liquidity issues stem directly from UMC's systemic and calculated practice of overcharging in connection with the agreements. UMC has had knowledge of [Children's] material operating losses and its lack of liquidity since at least 2013."
According to the lawsuit, UMC's threat to cut services to Children's represented a literal threat to the lives of its patients.
"There is no dispute that termination of the agreements puts children's lives in jeopardy," the suit stated.
"UMC has used the threat of unilaterally terminating the agreements in an effort to coerce a UMC takeover of [Children's] on UMC's terms, which do not preserve [Children's] sole mission -- the maintenance of [Children's] as a separately licensed, non-profit children's hospital," the suit said.
UMC officials denied any ulterior motives in negotiations with Children's, which UMC Board Chairman Steve DeGroat said were in good faith.
"Their filing states that their board authorized bankruptcy as early as Feb. 11," DeGroat said. "All this while, EPCH gave us the impression that an agreement might be acceptable to them. It seems that their intent was never to come to an agreement or to pay what they owe UMC or other creditors. It never had to be this way, and that is a tragedy for our community."
Escobar said she pleaded with members of the Children's board not to file for bankruptcy.
"It was completely unnecessary," Escobar said in an interview with The Bond Buyer. "Despite the fact that there were huge challenges, there were ways they could have navigated through them.
"The tragedy in all this is that had they signed an agreement with UMC so that Children's would have been a subsidiary, we would have maintained the mission and the vision, we would have paid down the debt owed to Texas Tech [Medical School], we would have honored the will of the voters and we would have brought some desperately needed stability to their finances," Escobar said.
Over the past year, Children's had been searching for a strategic partner, possibly another children's hospital in another major Texas city, but UMC was the only hospital with a ready offer, Escobar said.
"When Children's walked away from a deal, we were all shocked," Escobar said. "My fear is that this will damage the Children's Hospital in ways that the board doesn't even understand.
"I think it's a black eye for the community," she said. "It's going to be very difficult for them to fund raise and very difficult to keep their volumes up. What message does bankruptcy send to the parents, what message does it send to physicians, what message does it send to the donors?"
Since the filing, four of Children's nine board members have resigned, with some citing the bankruptcy and others leaving without explanation.
When mediation was underway in March, Children's board chairwoman Rosemary Castillo told the El Paso Times that her board was "more than accommodating," even going so far as to let itself be replaced by new board members.
"We have made every effort to accommodate the situation (so) this hospital is going to be saved," Castillo said. "It's not about us. It's about the physicians. It's about the children. It's about all the lives that will be affected. We were willing to make any and all concessions."
In the first bankruptcy hearing May 21 in Austin, U.S. Bankruptcy Judge H. Christopher Mott said he would consider sending the two hospitals back to mediation rather than approving the bankruptcy.
"I'm going to be very inclined to compel mediation in this case," Mott said, according to the El Paso Times.
Patricia Tomasco, the attorney for Children's, said that that UMC and Children's are so interdependent that both are at risk.
"I liken this situation to (conjoined) twins who want to shoot each other and don't realize it would be devastating to them both," she said.
