Small-town Missouri hospital faces restructuring after default declared

A small-town southwest Missouri hospital is scrambling to restructure after its bond trustee declared it to be in default.

In a special meeting Friday, the board of Nevada Regional Medical Center agreed to hire Stroudwater Associates' Jason McCormick as its chief restructuring officer.

The hospital had been searching for someone to fill that role after it experienced a liquidity shortfall and violated bond indentures.

The city-owned hospital's operating losses resulted in multiple covenant breaches last year. On Jan. 22, trustee UMB Bank served the city of Nevada, which issued the bonds, with a declaration of default on the Series 2007 hospital refunding revenue bonds, Series 2007. It did so at the request of bond insurer Build America Mutual, according to a notice posted Jan. 31 on the Municipal Securities Rulemaking Board's EMMA disclosure website. The issue has $9.955 million outstanding from the original $21.73 million of principal.

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The hospital serves the city of 8,000, which is the seat of 19,000 population Vernon County.

The next steps after the selection of a chief restructuring officer are still being discussed in executive sessions of the NRMC board, said Daniel Doyle of Lashly & Baer, a St. Louis-based law firm retained by the board. He said the board is currently in talks about a forbearance agreement with Build America Mutual and UMB Bank.

In a Jan. 6 report to the hospital's board of directors and management posted on EMMA, auditing firm FORVIS raised doubts about NRMC's ability to continue as a going concern, citing a decline in cash to less than 20 days by June 30, 2023, and further declines after that.

According to 2023 financial statements, the hospital had $35.6 million in total assets and $24.4 million in liabilities by the end of June. It reported $2.5 million in cash, down from $15.18 million in 2021. 

The hospital attributed its decline in cash primarily to operating losses and repayments of debt. Its net position decreased by $649,433 in 2023 and overall results declined by $1,962,087. A dropoff in COVID-19 relief payments and Paycheck Protection Program loan forgiveness drove a $5.5 million decrease in nonoperating revenues.

The declaration of default notes that the bonds are secured by a mortgage lien on hospital facilities and other collateral. It goes on to list seven defaults, including the breach of a section of the mortgage that requires NRMC to comply with the covenants in the indenture.

The hospital also breached the liquidity covenant of the indenture. And it failed to obtain the prior approval of the trustee and the bond insurer before it hired Rural Hospital Group in September 2022 and February 2023 to provide management services. 

It breached the efficient and economic operation covenant by failing to secure professional assistance in complying with its business obligations, according to the declaration. It incurred additional debt beyond its 15% limit, issuing a note payable for $1.42 million to buy a medical clinic building and failing to collect operating revenues from a nursing home. It then failed to pay its debts in a timely manner.

Finally, the NRMC's board failed to comply with its own bylaws; the Financial Strength Committee has not met in years, for example. The declaration charges the board with mismanagement for the hospital's ongoing financial decline.

On the same day Nevada received the declaration of default, Build America Mutual's chief surveillance officer, Michael Weinstein, sent a letter to the NRMC's board of directors, according to a report by the local Nevada Daily Mail. The letter urged the board to accept BAM's preferred chief restructuring officer; to discuss potential terms of forbearance; and to consider the recommendation of its own management consultant, RHG, which had suggested NRMC replace its current facility with a smaller hospital financed through a low-cost USDA loan program. 

As to why the board had not already accepted BAM's chief restructuring officer, Doyle said: "The CRO was not then identified by BAM and BAM appeared to want the CRO to usurp the board's and the city's governance of the regional medical center. BAM has now identified its CRO selection, which has made a presentation to the Board and is being considered as a consultant to the hospital."

In his letter, Weinstein also warned NRMC that a bankruptcy declaration would push the city itself into bankruptcy and would prompt a downgrade of the city's rating.

"Such filing would spark a vigorous legal challenge by the BAM and other NRMC creditors," Weinstein wrote. 

He said the remedies available to the trustee include placing hospital revenues into a lock box controlled by the trustee; occupation and control of the mortgaged hospital property; foreclosure of the lien and the sale of all NRMC property; and acceleration of the bond maturity date, among other avenues. 

Nevada City Manager Mark Mitchell told the Nevada Daily Mail that "like any other insurance company that doesn't like to pay a claim, BAM is doing everything possible to avoid having to pay off the bond."

BAM is successor in interest to the original insurer of the 2007 bonds, ACA Financial Guaranty Corp., according to the default notice.

"BAM's guaranty is an unconditional and irrevocable promise to make timely payments of principal and interest to bondholders, and as always, we stand ready to meet those obligations," BAM spokesman Michael Stanton told The Bond Buyer.