Mercy Iowa City calls bondholder’s publicity tactics ‘inexcusable’

IOWA CITY — Mercy Iowa City late Monday responded to a bondholder’s demand it be placed in a court-appointed receivership by disputing the arguments behind the receivership request and by calling into question the publicity tactics taken.

“Preston Hollow’s assertions are incorrect and their decision to only contact the media and not hospital leaders is inexcusable,” Mercy Chief Restructuring Officer Mark Toney said in a statement, issued with the help of Wixted & Company, a strategic communications firm out of Des Moines. “Our board and management team have tried to work collaboratively with Preston Hollow on many fronts, but have found many of Preston Hollow’s threats, statements, and actions to be harmful to Mercy Iowa City.”

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Mercy Iowa City calls bondholder’s publicity tactics ‘inexcusable’

Preston Hollow Community Capital of Texas, which invested all $41.8 million of Mercy’s 2018 bond series, and Computershare Trust Company, which took over for Wells Fargo as a master trustee of the series in 2021, filed the request for receivership Monday in Johnson County District Court.

Their argument was that Mercy Iowa City — which has been struggling financially for years — now is in “financial free fall,” with its liquidity plummeting about $40 million, or 52 percent, over the last nine months. At this point, according to court documents, Mercy is operating at a “cash burn” of about $2.6 million a month, with its own projections showing liquidity shrinking to under $5 million by Sept. 29.

That, according to the filing, is “insufficient to maintain ongoing operations.”

“The borrower is balance-sheet insolvent and unable to pay its debts as they become due, including the principal and interest payments due in respect of its $62 million in publicly-issued bonds,” according to the receivership request. “If action is not taken immediately, the hospital may be forced to cease operations and shutter.”

But, according to Mercy’s Monday response, the Preston Hollow argument hinges on allegations of default that hospital administrators dispute. Mercy, according to the statement, had been working to resolve those differences behind closed doors — before Preston Hollow sent out a public statement Monday.

“We are deeply disappointed by Preston Hollow’s actions when we have taken many steps to improve our finances and kept them informed and involved with our day-to-day operations and strategies,” Toney said. “Our preference is to work with the bondholders to find viable solutions, but the board will continue to protect all stakeholders as it fulfills its duties and the mission of the organization.”

Mercy, late Monday, accused Preston Hollow of seeking to “impugn the Mercy Iowa City Board of Directors, all of whom serve without compensation, in an effort to advance their false narrative.”

Preston Hollow senior representatives asked to meet with Mercy’s board and were scheduled to fly via private jet to Iowa City on Tuesday to discuss paths forward, according to the Mercy statement. The meeting, Mercy officials hoped, would “reestablish a more collaborative dialogue between the parties."

But Preston Hollow canceled Sunday afternoon “without reason,” according to Mercy, and then issued the statement without notifying the hospital of its plans to do so.

Notice of default

In the receivership request, Preston Hollow and Computershare suggest Peter Chadwick of Berkeley Research Group to serve as the receiver — calling him a “seasoned health care professional who specializes in assisting underperforming and financially distressed health care providers.”

He would, if appointed, maintain and preserve the bondholders property collateral, recover funds, and — if necessary — “conduct a process for the sale or monetization of the collateral and hospital facilities, including, without limitation, an affiliation, joint venture or some other strategic transaction with another health care provider or providers.”

Last week, Preston Hollow and Computershare issued a notice of default on Mercy’s $44.6 million 2011 revenue bonds and the $41.8 million 2018 bonds.

The default notice accused Mercy of several shortcomings, including:

Mercy attorneys disputed the assertions, starting with the big-picture notion of default.

“(Mercy) is plainly not in default,” according to a response letter sent Friday. “Specifically, (Mercy) has not admitted that it is insolvent or unable to pay its debts as they become due. To the contrary, (Mercy) is generally paying its debts as they become due, and in fact, (Mercy) has timely made all principal and interest payments due and payable on the bonds.”

To the assertion Mercy has failed to enter an “account control agreement,” the hospital accused its bondholder of failing to provide it the necessary paperwork.

“In any event, (the agreement) does not contain a deadline for entering into such account control agreements,” according to the Mercy response, noting it is “considering the request.”

Where the default notice accuses Mercy of failing its “liquidity covenant,” which requires the hospital system to maintain at least 60 days cash on hand as measured on June 30 and Dec. 31, Mercy argued it met that mark in December and June financials have yet to be audited.

In May, however — after Moody’s downgraded Mercy’s credit rating from B1 to Caa1 in response to “severe cash flow deterioration” — the investors service reported the hospital had plummeted from 254 days cash on hand in 2021 to 54 days cash on hand on Dec. 31, 2022.

Mercy argued it has met a requirement to retain a consultant if its income available to pay debts fell to a certain level.

“Mercy Iowa City continues to provide care to our patients and their families. Our dedicated physicians and staff are focused on caring for our community, which is what we have done for the past 150 years,” Mercy Chairman and CEO Tom Clancy said in a statement Monday. “We have taken great care to be as forthcoming as possible with our employees, recognizing they are the lifeblood of our organization and the care provided for our community.”

While the receivership moves through the court system, Mercy will continue operating “in the ordinary course, in its ongoing effort to provide excellent patient care through its talented physicians and nurses, and under the guidance and direction of the current management team and its Board of Directors.”

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