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Diving brief:
- Representatives from Steward Health Care appeared in bankruptcy court for the first time yesterday via a virtual hearing, about 24 hours after filing a highly anticipated lawsuit. petition for chapter 11 protections.
- Steward's attorney testified about how the nation's largest physician-run hospital operator plans to return to solvency and explained why Medical Properties Trust is the only lender supporting Steward's debtor-in-possession financing .
- Part of Steward's debtor-in-possession financing is tied to its ability to make rapid hospital sales — a timeline that Steward's attorney called “unachievable.”
Dive overview:
The hearing drew as many as 500 people, sometimes causing line cuts as people called in to hear details of the major bankruptcy filing.
Representative attorney Ray Schrock of Weil, Gotshal & Manges testified that a series of asset-based loans and bridge financing have kept Steward afloat since 2023. However, he said they never stabilized the business and that Steward was ” always on the verge of running out of cash.”
The Dallas-based for-profit organization had hoped to sell its physician group, Stewardship Health, to UnitedHealth subsidiary Optum Care to settle certain debts. The two companies began discussing terms in December 2023 and hoped to close the deal by March.
Proceeds from the sale of Stewardship would have been “more than enough” to repay Steward's bridge and asset-based loans, and possibly keep Steward from going to bankruptcy court, according to Shrock. However, he said the deal “has been delayed in regulatory approval.”
Massachusetts regulators disagree with that characterization and say Steward is responsible for the delay. Steward filed a notice of intent to enter into the deal 43 days ago. However, since then, it has failed to provide the state with key documents, according to Mickey O'Neill, communications director for the Massachusetts Health Policy Commission.
“In situations where the HPC receives all documents and information necessary to review a notice of material change in a timely manner, a delay of a month and a half is not uncommon,” O’Neill said via email. “In this case, however, the HPC did not receive the most important document for its review: the final agreement.”
U.S. Bankruptcy Judge Chris Lopez approved Medical Properties Trust's $75 million loan to Steward during the hearing, which will be used to finance its operations during the Chapter 11 proceedings. MPT owns the real estate where find Steward's 31 hospitals, and Steward also owes MPT $6.6 billion on outstanding leases through 2041.
Steward had a consortium of lenders before declaring bankruptcy, but from now on MPT will be its only DIP financier.
The operator wanted MPT to be its sole partner after other lenders pressured Steward to issue Worker Adjustment and Retraining Notice Act notice, which precedes either site closures or massive layoffs.
Schrock told the court it would be irresponsible to issue such opinions.
“We could not imagine a more destabilizing event,” he said. “We don’t think there will be any closures.”
MPT’s financing comes with onerous conditions. To secure an additional $225 million in funding later, Steward will have to sell the hospitals starting in June and complete the sales by July.
Steward began marketing hospitals in January, according to Schrock. However, Steward has not completed any sales.
Transactions are likely to be complex.
“Some hospitals are very profitable, some are not,” Schrock said. “We're trying to sell all of these hospitals…and doing a massive M&A process like this, we have to do it efficiently. We need to do it quickly, but we also need to do it safely.
The attorney said he was unhappy with the agreed-upon timeline, but called it necessary for funding. He warned the court that Steward was unlikely to achieve his goals.
“We're going to keep our word and do everything we can to keep it, but I'm here to tell you right now, you can't make these hospital sales,” Shrock said. “The likely timeline until June is not feasible, okay? This is not something that I can sit here and say you can do without violating state law.
Hospital sales are a key issue to watch going forward as lenders compete for priority status to get paid.
Attorney Kris Hansen, who represented the asset-based lenders, pushed back on the idea of tying hospital sales to DIP financing and accused MPT of trying to ensure it got paid first before everyone else lenders.
“This is a complete land grab by the MPT, Your Honor. There is no contract or policy to which the Debtors are a party that would require this result. And this is going to be a very contentious issue – if not the most heated – among the secured lenders, the creditors committee, the MPT and a myriad of other creditors in these cases,” Hansen said.