Mercy Iowa City sale heads to bankruptcy auction

IOWA CITY — Mercy Iowa City has received at least one bid to compete with the University of Iowa’s $20 million offer to purchase substantially all its assets as part of the hospital’s Chapter 11 bankruptcy petition — triggering an auction Wednesday morning in Chicago.

Attorneys didn’t disclose how many bids Mercy received to compete with the UI offer — which set the minimum at $20 million and required an additional “breakup fee” of $800,000 — or 4 percent — to surpass. That means any competing bid has to be at least $20.9 million — including the breakup fee and a required bid increment of $100,000.

Originally, Mercy wanted to impose both a breakup fee and a $400,000 expense reimbursement for the time UI administrators spent working on their offer. But Mercy’s largest bondholders objected, lowering the bar to compete.

The deadline to submit bids was Monday, but no details were made public.

The auction is scheduled for 10 a.m. Wednesday at the law offices of McDermott Will & Emery LLC in Chicago. It is not open to the public, according to Mercy attorney Roy Leaf, with Nyemaster Goode PC in Cedar Rapids.

Leaf didn’t tell The Gazette how many competing bids Mercy received but said the bidders will be present in person for the auction.

Should the university secure Mercy’s assets in the auction, administrators have committed to maintaining the hospital as a health care operation and offering jobs to many Mercy employees. But in an email sent to Mercy staff Tuesday — and obtained by The Gazette — a Mercy vice president warned about presumptive UI Health Care outreach.

“Many of you are being contacted by UIHC to establish meetings to discuss the transition,” according to the message. “Please hold on responding until we have clearance from legal to do so. I will be facilitating the scheduling.”

Credit bid possibility

Although Mercy officials — in their initial proposed bidding procedures — tried to discourage the hospital’s largest bondholders from exercising their right to “credit bid,” the eventual court order establishing the rules ensured they could.

Credit bidding lets secured creditors bid the debt that a debtor owes them in an auction for the assets. In the case of Mercy, that allows bondholder Preston Hollow and master trustee Computershare to bid on Mercy using the $63 million owed to them.

The winning bidder at the action would own Mercy’s assets, free of any of the hospital’s current debt, allowing the bidder then to search for a new operator or sell the assets. The bidding rules removed any requirement the winning bidder would have to maintain Mercy as a health care operation.

Although details haven’t been made public about the Mercy bids, Preston Hollow last month aired intentions to go the route of credit bidding.

“Given the extremely depressed value of the stalking horse bid (of the UI), the secured bondholder representatives intend to exercise their right to credit bid,” according to court documents filed by Preston Hollow and Computershare.

If the credit bid is part of the auction, that would increase the UI purchase price to at least triple its original offer — if the university wants to win.

When the UI went to its governing Board of Regents in August for permission to bid on Mercy, officials received the OK to offer $20 million or to make “a competing bid for the assets that is greater than the proposed purchase price, but only in such amount that is necessary to secure the assets.”

To dissuade Preston Hollow and Computershare from taking the credit bid route, Mercy used against the bondholders their desire to be consulted and updated about various decisions. Specifically, in the sale procedures, Mercy promised to include the bondholders among its “consultation parties” so long as they committed in writing not to “submit a bid or credit bid for the assets or otherwise actively participate in the auction.”

As part of negotiations, Mercy eventually agreed to work into its procedures a clause allowing credit bidding — as long as the bondholders gave notice and a 10 percent deposit. Mercy also reserved its right to “challenge the validity, extent or priority of the liens and security interests relating to the alleged claim underlying any credit bid or otherwise object to any credit bid.”

Monthly expense in the red

Mercy, which filed for bankruptcy protection Aug. 7 after years of financial decline, reported on a schedule of assets and liabilities the net book value of their real estate — encompassing 19 properties — at $30.4 million.

A review of property assessment records by The Gazette found Mercy’s current real estate assets are valued at more than $137.3 million. When asked during a recent court hearing about the assessed value of Mercy’s properties, attorneys said they didn’t know.

In a monthly operating report filed with the bankruptcy court Sept. 21, Mercy reported a “net worth” — calculating in both total assets and total liabilities — at nearly $97 million. But it also reported an income statement for the month at $6.4 million in the red — a loss driven largely by $5.6 million paid for “general and administrative expenses,” which is separate from its “cost of goods sold.”

Financial documents filed in August showed Mercy paid more than $7 million to companies associated with its restructuring and bankruptcy — including $3.2 million to ToneyKorf Partners LLC, which it hired March 30 for interim management and restructuring services.

The court recently OK’d the continued use of ToneyKorf, including a fee schedule that has Mercy paying Chief Restructuring Officer Mark Toney $950 an hour, as well as a chief operating officer at $650 an hour, a vice president of human resources at $610 an hour and a finance manager at $300 an hour. Mercy’s interim chief financial officer, also provided through ToneyKorf, makes $725 an hour, capped at $105,000 a month.

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