Bondholders await Chapter 11 liquidation after Iowa hospital finalizes sale

A struggling Iowa hospital's sale to its primary competitor through a bankruptcy proceeding has closed.

In a case filing by Iowa City-based Mercy Hospital, the notice of sale closing made official the hospital's sale to the University of Iowa through the Chapter 11 bankruptcy process.

Mercy filed for bankruptcy in August, thwarting a push by its largest bondholder, Preston Hollow Community Capital, and bond trustee Computershare Trust to put the nonprofit hospital into receivership and demand immediate payment of principal and interest on $62.145 million of outstanding bonds.

Mercy Hospital

On Jan. 31, the deal officially closed and the hospital's assets transferred to the university, which will not be taking on any of Mercy's debts, a university spokesperson confirmed.

"The final recoveries in the bankruptcy case will be dealt with under a Chapter 11 plan of liquidation," Mercy spokesperson Jamy Houck said. "Talks are ongoing among the major constituents in the bankruptcy case about the framework for such a Chapter 11 plan."

Citing "the current state of contested matters before the bankruptcy court," Preston Hollow declined to comment. Computershare Trust did not respond to requests for comment.

The auction of the hospital's assets was set in motion in September by the U.S. Bankruptcy Court for the Northern District of Iowa, which entered an order approving bidding procedures. On Oct. 4, Preston Hollow submitted the highest bid, but a conflict among Mercy, its unsecured creditors and the bondholder representatives led the hospital to reopen the auction.

On Oct. 27, Mercy filed notice that the University of Iowa was the winning bidder.

The Iowa Board of Regents in August had agreed to pay $20 million for Mercy's real estate and business assets without taking on any of the hospital's debts. Its final bid in the late October auction came in at roughly $28 million, according to court documents.

The bondholder representatives' rejected bid had required the use of all of Mercy's remaining cash and foundation funding prior to closing.

On Nov. 7, the bankruptcy court entered an order approving the sale of all the hospital's assets to the university and finalizing the asset purchase agreement. Under the terms of that agreement, the purchased assets exclude securities, investments, bond funds and other funds created by bond indentures and financial assurances, among other things. 

When the sale closed Jan. 31, the Iowa City-based university, which runs its own healthcare and hospital system, announced its assumption of the former Mercy Hospital's operations and its renaming to University of Iowa Health Care Medical Center Downtown.

When Mercy served notice to its contract counterparties that it was assigning to the university the contracts and negotiating the relevant default cure amounts, 11 counterparties filed formal objections and others lodged informal objections with Mercy's counsel, according to court documents. The court overruled their objections.

"Mercy Iowa City is appreciative of the University of Iowa's collaboration and cooperation in preserving continuing care for Mercy's patients and employment for its staff and physicians," Mercy Chief Restructuring Officer Mark Toney said. "While the sale is not the end of the Mercy bankruptcy case, it is a major milestone."

Moody's Investors Service withdrew its Caa1 rating upon the bankruptcy filing. It had rated the hospital's 2011 revenue bonds A2 when they were issued. The hospital's 2018 revenue bonds, purchased by Preston Hollow, were unrated.