Bondholder Preston Hollow tops University of Iowa in Mercy auction

IOWA CITY — In a stunning turn of events many didn’t anticipate — including Mercy Iowa City and its executives — bondholder Preston Hollow Community Capital in a long and drawn out auction outbid the University of Iowa for Mercy’s assets as part of the hospital’s Chapter 11 bankruptcy case.

That means instead of transitioning the 150-year-old community hospital to UI ownership — which many saw as a foregone conclusion, given the university’s $20 million “stalking horse bid” as part of Mercy’s bankruptcy proceedings — Dallas-based Preston Hollow will join collaborator American Healthcare Systems in sustaining Mercy Iowa City as a “viable community hospital.”

“In connection with the hospital acquisition, Preston Hollow Community Capital and the other bond investors will also make significant capital investments in order to stabilize the hospital’s operations, restore community-care service lines, and bring the facility back to profitability,” according to a Preston Hollow press release.

News of the auction results broke Tuesday evening in a bankruptcy court filing.

In a news release, Preston Hollow said the community hospital it plans to run with American Healthcare Systems will be organized as “an Iowa not-for-profit organization with board members comprised of community leaders in Iowa City and Johnson County.”

Preston Hollow — which in early August, before Mercy filed for bankruptcy, asked a district court to appoint a receiver to take over the struggling hospital’s operations — touted American HealthCare Systems’ “extensive experience rehabilitating hospitals across the United States.”

Although none of the involved parties on Tuesday shared many specifics of a new hospital concept, Preston Hollow suggested Steindler Orthopedic Clinic will be involved.

“Preston Hollow, along with our partner American Healthcare Systems, look forward to building on Mercy Iowa City’s strong legacy in the community reflected in the exceptional work of the hospital’s talented team of doctors, nurses, and other employees who will continue to deliver high-quality, affordable health care to individuals and families in the region,” Jim Thompson, chairman and CEO of Preston Hollow Community Capital, said in a statement.

“Additionally, as part of this transition process, we look forward to partnering with Steindler Orthopedic Clinic.”

In a statement, Steindler President and CEO Patrick Magallanes said Steindler has been the orthopedic care provider at Mercy for nearly 75 years.

“We are reassured that Preston Hollow is committed to preserving a community hospital and affiliated services in Iowa City,” he said. “What this means for the physicians, nurses, and employees who have remained loyal to Mercy over a lengthy period of uncertainty and what this means for our community cannot be overstated.”

Near-term transition

As part of the transfer and transition, Preston Hollow and American Healthcare Systems will conduct all-team meetings with doctors, nurses, and other Mercy employees to collect feedback and recommendations, answer questions, and “establish the partnership necessary to continue meeting the hospital’s mission in the years to come.”

“We know Preston Hollow as a bondholder, and we have learned more about American Healthcare Systems,” Mercy President and CEO Tom Clancy said in a news release. “AHS is experienced at operating and rehabilitating hospitals across the country.

“As we celebrate our 150th anniversary here in Iowa City, it is comforting to know that they will continue to operate the hospital and our clinic network as a community-based health system.”

Details of how much Preston Hollow bid and what is and is not included in its pending sale agreement haven’t been made public. A judge hasn’t yet reset a hearing for the sale, which previously was scheduled for Tuesday prior to the auction delays.

But Mercy reported final approval is expected “in the near-term,” allowing American Healthcare Systems to assume operational and financial responsibility of the hospital as soon as mid-November.

“Transition planning has already started,” Mark E. Toney, Mercy’s chief restructuring officer said in a news release. “We look forward to the new vision and path forward from AHS for the health system and are pleased by the commitment being made by AHS and Preston Hollow.”

Credit bid option

Tuesday’s auction news aligned with communication Mercy executives sent to employees last week, reporting, “all bids received were for an ongoing acute care hospital including our providers and staff.”

In the days before last Wednesday’s auction, UI administrators — assuming they, as Mercy’s “stalking horse” bidder, would win the day — already started reaching out to Mercy employees to arrange meetings about the anticipated takeover, according to a Mercy email obtained by The Gazette.

But when Preston Hollow, Mercy’s largest bondholder, and master trustee Computershare exercised their option to “credit bid” from the nearly $63 million in debt Mercy owes them, the university eventually bowed out.

In the end, Preston Hollow and American Healthcare System “provided the best overall bid” — an amount that included a mandatory $800,000 fee for breaking up the UI-Mercy deal.

In hopes of persuading the university to raise their bid, Mercy continued the auction past the initial auction date last week — sources told The Gazette. But, despite backroom negotiations that persisted over the weekend and into today, Mercy officials finally signed off on Preston Hollow’s winning bid Tuesday, according to court documents.

The credit bid option allowed Preston Hollow to assume the assets free and clear of the debt, pension liabilities, unpaid dues, and uncured contracts the Mercy operation had accrued over years of financial decline.

Although Mercy executives in their bidding procedures reserved the right to object to or challenge the “validity, extent or priority of the liens and security interests relating to the alleged claim underlying any credit bid,” details of if or when Mercy might do that have not been made public.

“We are also appreciative of the work and commitment shown by the University of Iowa as the stalking horse in the auction process,” Toney said in his statement. “The university’s commitment was driven by preserving health care in Iowa City, which we believe this process has done.”

Looking forward, back

A relatively-young website for American Healthcare Systems — a Glendale, Calif.-based for-profit organization with health care management expertise — lists a four-person corporate leadership team and six news releases dating back to July 2021.

Half of those report on a series of health care acquisitions in the last year, including Gateway Regional Medical Center in Granite City, Ill. In November 2022; Vista Medical Center East in Waukegan, Ill. in May; and ProMedica Coldwater Regional Hospital in Coldwater, Mich. two weeks later.

In announcing the Michigan acquisition, American Healthcare Systems shared financial challenges precipitated the asset purchase agreement.

“American Healthcare Systems has a plan to help ensure the sustainability of Coldwater Regional Hospital, and it is expected to focus on maintaining or expanding hospital services,” according to its news release.

Mercy, when it filed for bankruptcy protection Aug. 7, did not disclose how or why it agreed to the $20 million purchase agreement with the university — which in 2021 offered more than $605 million over 10 years to assume ownership.

That UI offer two years ago, according to documents obtained by The Gazette, included $85 million for Mercy’s unfunded pension liability, along with staff retention efforts; $250 million for primary and specialty care growth; $150 million for financial performance improvement; $95 million for facilities upgrades; and $25 million for recruitment of new community providers.

The university at that time also proposed a $10 million foundation “to preserve and continue the (Sisters of Mercy) mission outside of the walls of the health care enterprise.”

Details of why that offer never materialized haven’t been made public.

The UI’s bankruptcy-related $20 million offer would have excluded Mercy liabilities like its tax debt, settlement costs, and employee-related dues — including those related to severance or retirement benefits.

Vanessa Miller covers higher education for The Gazette.

Comments: (319) 339-3158; vanessa.miller@thegazette.com