Bondholder Preston Hollow leads the University of Iowa at the Mercy Auction

Mercy Iowa City Hospital in Iowa City, Iowa, on Monday, Aug. 7, 2023. The financially troubled hospital has signed a letter of intent with the University of Iowa to be acquired by the university for a proposed $20 million. The hospital and staff will move to UI Health Care. (Jim Slusiarek/The Journal)

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

This means that instead of the 150-year-old community hospital transferring to UI ownership — which many took for granted, given the university’s $20 million “stalking horse bid” as part of Mercy’s bankruptcy proceedings — Preston Hollow-based Dallas to collaborator. American Health Care Systems continues to maintain Mercy City, Iowa as a “viable community hospital.”

“In connection with the acquisition of the hospital, Preston Hollow Community Capital and the other bond investors will also make significant capital investments in order to stabilize hospital operations, restore community care service lines, and return the facility to profitability,” a news release said. Preston Hollow press release.

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

In a press release, Preston Hollow said the community hospital it plans to run with American Healthcare Systems will be organized as an “Iowa nonprofit 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 the district court to appoint a receiver to take over the struggling hospital’s operations — American HealthCare Systems praised American HealthCare Systems’ “extensive experience rehabilitating hospitals throughout United State”.

Although none of the parties involved Tuesday shared many details of the new hospital concept, Preston Hollow suggested Steindler Orthopedic Clinic would be involved.

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

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

In a statement, Patrick Magallanes, Steindler’s president and CEO, said Steindler has been Mercy’s orthopedic care provider for nearly 75 years.

“We are reassured that Preston Hollow is committed to maintaining a community hospital and its services in Iowa City,” he said. “What this means for the doctors, nurses and staff who have remained loyal to Mercy over such a long period of uncertainty and what this means for our community cannot be overstated.”

Transformation in the near term

As part of the relocation and transition process, Preston Hollow and American Healthcare Systems will hold all-team meetings with doctors, nurses and other Mercy staff to gather feedback and recommendations, answer questions, and “establish the partnership necessary to continue meeting the hospital’s mission.” in the next years.”

“We know Preston Hollow as a bondholder, and we have learned more about America’s health care systems,” Tom Clancy, Mercy’s president and CEO, said in a press release. “Ambulatory Services has experience in 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 our hospital and network of clinics as a community health system.”

Details about how much Preston Hollow is offering and what is and is not included in the pending sales agreement have not been announced. The judge has not yet rescheduled the sale hearing, which was previously scheduled for Tuesday before the auction was delayed.

But Mercy said final approval is expected “in the near future,” allowing American Healthcare Systems to take over operational and financial responsibility for the hospital in mid-November.

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

Credit offer option

News of Tuesday’s auction is consistent with communications Mercy executives sent to employees last week, reporting that “all bids received were for an ongoing acute care hospital including our providers and staff.”

In the days leading up to last Wednesday’s auction, UI officials — assuming they would win the day, as Mercy’s “stalking horse” — began reaching out to Mercy employees to arrange meetings about the anticipated acquisition, according to an email from Mercy obtained by The newspaper.

But when Preston Hollow and lead trustee Computershare — as Mercy’s largest bondholders — exercised their option in a “credit bid” of the debt they owed about $63 million, the university eventually pulled out.

In the end, Preston Hollow and American Healthcare System made the “best overall offer” — one that included a mandatory $800,000 fee to break up the UI-Mercy deal.

Hoping to convince the university to raise its bid, Mercy continued the auction beyond the initial auction date last week, sources told Al Jarida. But, despite behind-the-scenes negotiations that continued over the weekend and into today, Mercy officials finally signed off on Preston Hollow’s winning bid on Tuesday, according to court documents.

The credit offering option allowed Preston Hollow to assume assets free and clear of the debt, pension liabilities, unpaid receivables, and unsecured contracts that Operation Mercy had accumulated over years of financial decline.

Although Mercy’s executives reserved, in their bidding procedures, the right to object to or challenge “the validity, scope or priority of liens and security interests relating to the purported claim underlying any credit bid,” the details of whether Mercy Do it or when it has not been announced.

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

Looking back

Relatively young US health care systems website — a Glendale, California-based for-profit organization with health care management expertise — lists a four-person corporate leadership team and six newsletters dating back to July 2021.

Half of those reported a series of healthcare acquisitions in the past year, including Gateway Regional Medical Center in Granite City, Illinois, in November 2022; Vista Medical Center East in Waukegan, Illinois in May; and ProMedica Coldwater Regional Hospital in Coldwater, Michigan, two weeks later.

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

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

Mercy, when it filed for bankruptcy protection on 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 take over ownership.

That UI offering two years ago, according to documents obtained by The Gazette, included $85 million for Mercy’s unfunded pension liabilities, along with employee retention efforts; $250 million for primary and specialty care growth; $150 million to improve financial performance; $95 million for facility development; and $25 million to hire new community service providers.

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

Details of why this offer was never implemented were never made public.

UI’s $20 million bankruptcy filing would have excluded Mercy’s liabilities such as its tax debts, settlement costs and employee-related receivables — including those related to severance or retirement benefits.

Vanessa Miller covers higher education for the Journal.

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