Citing Mercy Iowa City ‘financial free fall,’ possible closure, lender seeks court intervention

IOWA CITY — Asserting Iowa City’s 150-year-old Mercy Hospital is in “financial free fall” and headed toward closure, an investor and holder of $41.8 million that Mercy borrowed in 2018 has asked a judge to “appoint a receiver on an emergency basis” to take operational control over the hospital facilities.

The receiver — suggested as Peter Chadwick of Berkeley Research Group, a “seasoned health care professional who specializes in assisting underperforming and financially distressed health care providers” — would preserve the bondholders’ property collateral.

Filed Monday in Johnson County District Court, the request by Computershare Trust Company, which took over for Wells Fargo Bank as master trustee of the 2018 bond series, and Preston Hollow Community Capital of Texas, which invested all $41.8 million five years ago, the plaintiffs together accuse Mercy of breaching financial covenants under its bond financing agreement.

Mercy’s liquidity, according to the court filing, has declined about $40 million — or 52 percent — over the last nine months. It is operating at a “cash burn” of about $2.6 million a month, and its own projections show liquidity will shrink 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.”

Mercy Iowa City has been battling financial challenges for years — including its struggle to find a new managing partner; the resignation of several top executives; its hire of a restructuring team for “distressed companies”; and a Moody’s credit rating downgrade.

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Before Monday’s receivership request, Computershare last week issued a default notice for Mercy’s $44.6 million in 2011 bonds and the $41.8 million in 2018 bonds.

Proceeds of the 2018 bonds were to cover a portion of the “construction, renovation, expansion, equipping, and furnishing of the borrower’s existing hospital facilities, including the purchase of routine capital equipment, hardware, and software, all located on the borrower’s campus at 500 East Market Street, Iowa City,” according to a May 2018 summary of the revenue bonds.

In a statement, Preston Hollow said it had been “pleased to make a substantial investment in Mercy Iowa City in order to support the hospital’s mission of ensuring families in Johnson County and eastern Iowa have access to high-quality, affordable health care services.”

But, “unfortunately, since that time, the Mercy Iowa City board of directors has made a series of decisions that have put that mission at risk, along with hospital’s ability to meet its financial obligations to their talented team of nurses, doctors, and more,” Preston Hollow officials said in a statement. “With the board having refused to shift its approach to address these issues and with the hospital now on the verge of insolvency, the choice remaining for Preston Hollow Community Capital is to request that Mercy Iowa City be placed in a court-appointed receivership in order to stem its unsustainable financial losses, stabilize its operations and avoid a closure of the facility.”

Mercy response

In response to last week’s default notice, an attorney for Mercy on Friday said the document was “factually incorrect” and filled with “incorrect assertions.”

“We write in response to the default notice sent to us on July 18, 2023, to correct material and fundamental misstatements,” according to the letter from Mercy attorney Daniel Simon to Computershare. “Your assertion that (Mercy Iowa City) is currently in default is factually incorrect.”

The letter continued, “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.”

Mercy President and Chief Executive Officer Tom Clancy and Chief Restructuring Officer Mark Toney told employees in a companywide email that “We disagree with the notice, and our attorneys have responded with a letter that disputes their assertions and outlines our views of the facts.”

In that email Friday, Mercy executives affirmed, “We have made all of the payments on the bonds as required (like making the payment on your home loan when due).”

Just days earlier, Mercy leaders held town hall meetings updating its staff on “extraordinary progress” in addressing the community hospital’s financial standing — including improving cash collections and its troubled electronic health records system.

The executives said Mercy had cut its use of traveling nurses by 30 percent and improved recruiting. One administrative summary of the meetings, though, reported patient counts continued to fall — reaching 54 a day, which is “not profitable.”

Default dispute

In the receivership request, though, Preston Hollow accused Mercy of having “no plan or strategy to stem or reverse the borrower’s operating losses and revitalize its business.”

Preston Hollow, according to court documents, has implored Mercy for months to formulate a turnaround plan “before it falls off the financial cliff.”

“Preston Hollow has even offered to provide interim bridge financing to the borrower to provide for its continued operation and delivery of patient services while such a turnaround plan is being implemented,” according to the request. “But the borrower’s board and management have buried their heads in the sand.”

In May, 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 plummeted from 254 days cash on hand in 2021 to 54 days cash on hand on Dec. 31, 2022.

Mercy said it had met a requirement to retain a consultant if income available for debt service fell to a certain level.

“Despite your incorrect assertions regarding any defaults under the governing documents, (Mercy’s) board, management, and its advisers remain committed to carrying out (Mercy’s) ongoing mission to its community,” according to the Mercy letter disputing a default. “We encourage the bondholder parties to reengage in a constructive dialogue regarding strengthening (Mercy’s) balance sheet and avoid taking actions that may erode value and trust between the parties.”

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