IOWA CITY — Although Mercy Iowa City wants an expeditious sale of its assets — after the 150-year-old hospital filed for Chapter 11 bankruptcy this month — its bondholders and creditors this week asked a judge to tap the brakes to give them time for due diligence and to maximize the “value of the sale.”
“(Mercy’s) proposed bidding procedures are premised upon an exceptionally abridged timeline,” the hospital’s primary bondholders argued in court filings Thursday, referencing Mercy’s request for a Sept. 19 deadline for other bids to compete with the University of Iowa’s $20 million opening offer.
“The timeline under the proposed bid procedures is so compressed that it could potentially deter interested parties from participating in the sale process and have a chilling effect.”
Chief Judge Thad Collins on Friday agreed to move a hearing on the timeline and sale process from Aug. 31 to Sept. 13 — which is just a week before the Sept. 19 bid deadline Mercy wants him to approve.
Mercy didn’t object to the new hearing date, but Mercy attorney Dan Simon said his client still will be pushing for an expedited process.
“And that’s because, in our view, the operations of the hospital remain fragile,” Simon said. “For every week or two weeks this is pushed out, there is a significant cost.”
Mercy this week reported making $10.5 million in gross revenue in July and $144.6 million in the budget year that ended June 30. It also reported that, in the 90 days before filing for bankruptcy Aug. 7, it paid more than $48 million to a long list of creditors and plans to pay hefty fees in the millions to reorganization consultants and leadership.
Mercy’s bankruptcy followed years of financial decline, struggles finding and maintaining a managing partner, appointment of a restructuring agency earlier this year, and a petition in late July from its largest bondholders seeking a receiver to take over hospital operations.
As part of its bankruptcy proceedings, Mercy announced that a UI offer to buy its assets for $20 million would be the first and lowest bid and asked a judge to set a deadline for any other offers of Sept. 19 — with a Sept. 22 auction and Sept. 27 sale hearing.
Shortly after Mercy’s request, its bondholders asked the judge to appoint an investigator to answer key questions about the proposed sale and bankruptcy — including why previous offers from the university and other hospital systems fell through.
On Aug. 15, the court formed a committee of creditors, who also have a list of questions and the desire for more time to get up to speed on the case — joining the bondholders and the acting United States trustee in seeking a slowdown.
‘Chill competitive bids’
Mary R. Jensen, the acting U.S. bankruptcy trustee for the Midwest Region 12, did more than request a continuance by objecting to Mercy’s request for an expedited timeline. In court documents Thursday, she noted that “while such sales are generally permissible, due consideration and adequate time must be afforded to prospective purchases.”
The reason, she said, is to produce the “highest and best offer possible and to protect the integrity and transparency of the bankruptcy process.”
With those intentions in mind, Jensen objected to Mercy’s rushed sale due to a current lack of evidence that it has marketed the assets sale to other possible buyers and because Mercy has disallowed “bid protections” for the UI that would dissuade other possible contenders.
Mercy has asked to impose bid protections paying the UI a 4 percent breakup fee amounting to $800,000 and up to $400,000 in expenses — totaling $1.2 million — if it doesn’t win Mercy’s assets. That means any entity hoping to outbid the UI would have to offer no less than $21.3 million — with a required $100,000 initial bid increment.
“The imposition of an initial overbid amount must be in the best interest of the estate,” she wrote. “Here, the initial overbid amount threatens to chill competitive bids without any offsetting benefit to the estate.”
Plus, according to Jensen, it’s excessive.
“It is well settled law in the Eighth Circuit that an unsuccessful stalking horse bidder may seek reimbursement of its actual expenses, or it may seek a breakup fee which is designed to compensate the unsuccessful bidder for the risk and costs incurred in advancing the competitive bidding process,” she said. “Not both.”
Additionally, the abbreviated time frame won’t allow for compliance with bankruptcy code, which requires 21-day notices to interested parties before the sale. And it doesn’t give other bidders enough time to formulate competitive offers, she said.
“That deadline does not appear to provide sufficient time for other interested bidders to conduct their due diligence and submit a competitive bid,” Jensen wrote.
Stakes ‘are too great’
That issue gets at the heart of the concerns of Mercy’s largest bondholders, Preston Hollow Community Capital and Computershare Trust Co., which on Thursday also asked for a slowdown, given Mercy’s assets sale “is the single most important component of these Chapter 11 cases.”
“The manner in which the sale is conducted, and the procedures and timeline governing the proposed sale, will have a fundamental and irreversible impact on creditor recoveries,” according to the bondholders, who’ve reported Mercy has more than $62 million in outstanding bond obligations and $23 million in pension plan liabilities.
Additionally, Mercy this week reported owing $17.3 million to “nonpriority” unsecured creditors, and an undetermined amount to “priority” unsecured creditors — like the Iowa Departments of Health and Human Services and Revenue, Iowa Medicaid, and Johnson County Public Health.
Mercy, according to the bondholders’ request for a slower timeline, has acknowledged the “paramount goal” of any sale is “maximizing the value of the sale proceeds received by the estate.”
“However, to date, (Mercy) has not allowed sufficient time or presented sufficient information to the court, the secured bondholder representatives or other parties-in-interest, to enable such parties to assess whether the proposed bidding procedures will actually achieve that objective or will have the opposite effect,” according to the bondholders.
They argued the Sept. 19 bid deadline is “exceptionally abridged,” given other potential bidders have to conduct due diligence, get their own internal approvals, engage attorneys, draft a purchase agreement, prepare bid materials, identify which employees would be retained and transfer funds, among other things.
“The most critical detail for evaluating the efficacy of (Mercy’s) proposed bidding procedures is whether the marketing process leading up to this point has been exhaustive and robust,” according to the bondholders, who want to know whether Mercy has contacted other potential buyers.
If so, they want to see whether that list includes both “strategic and financial buyers”; whether it encompassed local, regional and national purchasers; what information Mercy gave them; and whether any expressed interest.
“This is basic information,” according to the bondholders, stressing “the stakes involved in the sale process are too great to push through extraordinary bidding and auction procedures, particularly where (Mercy) has not been forthcoming with the necessary details and information about the comprehensiveness of the marketing process to date.”
Vanessa Miller covers higher education for The Gazette.
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