Dive Brief:
- Representatives from Steward Health Care appeared in bankruptcy court for the first time yesterday via a virtual hearing, roughly 24 hours after filing a highly anticipated petition for Chapter 11 protections.
- Steward’s attorney testified about how the largest physician-led hospital operator in the country plans to regain solvency and offered insight into why Medical Properties Trust is the only lender backing Steward’s debtor-in-possession financing.
- Some of Steward’s debtor-in-possession financing is attached to its ability to make quick hospital sales — a timeline Steward’s attorney called “not feasible.”
Dive Insight:
The hearing drew an audience of up to 500, at times causing the line to crash as people dialed in to hear details about the major bankruptcy filing.
Steward attorney Ray Schrock of Weil, Gotshal & Manges testified that a series of asset-based and bridge finance loans kept Steward afloat since 2023. However, he said they never stabilized the company, and Steward was “always very close to running out of cash.”
The Dallas-based for-profit had hoped to sell its physician group, Stewardship Health, to UnitedHealth subsidiary Optum Care to settle some debts. The two companies began discussing terms in December 2023 and had hoped to close the deal by March.
Proceeds from the Stewardship sale would have been “more than enough” to pay off Steward’s asset-based and bridge loans, and possibly keep Steward out of bankruptcy court, according to Shrock. However, he said the deal “got held up in regulatory approval.”
Massachusetts regulators disagree with that characterization and say Steward is to blame for hold up. Steward filed notice of intent to complete the deal 43 days ago. However, since then it hasn’t given the state key paperwork, according to Mickey O’Neill, communications director for the Massachusetts Health Policy Commission.
“In situations in which the HPC timely receives all necessary documents and information to review a Material Change Notice, a timeline of a month and a half is not unheard of,” said O’Neill over email. “In this case, however, the HPC has not received the single most important document for its review: the definitive 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 fund its operations during the Chapter 11 proceedings. MPT owns the real estate where Steward's 31 hospitals are located, and Steward also owes MPT $6.6 billion on leases running through 2041.
Steward had a consortium of lenders prior to declaring bankruptcy, but now MPT will be its only DIP financier.
The operator wanted MPT as its sole partner after other lenders pressured Steward to issue Worker Adjustment and Retraining Notification Act notices, which precede either site closures or mass layoffs.
Schrock told the court it would be irresponsible to issue such notices.
“We couldn't think of a more destabilizing event,” he said. “We don't think there's going to be any closures.”
MPT’s financing comes with hefty strings attached. To secure an additional $225 million of funding later, Steward will have to sell hospitals beginning in June and finish sales by July.
Steward began marketing hospitals in January, according to Schrock. However, Steward has not finalized any sales.
The transactions are likely to be complex.
“Some of the hospitals are very profitable, and some of them are not,” Schrock said. “We're trying to sell all of these hospitals ... and conducting a massive M&A process like this, we need to get it done efficiently. We need to get it done fast, but we also need to do it safely.”
The attorney said he was unhappy with the agreed upon timeline but called it necessary for financing. He warned the court that it was unlikely Steward would reach its targets.
“We're going to keep our word and do everything we can to meet it, but I'm here to tell you now, you can't close these hospital sales,” Shrock said. “The timeline of likely into June is not feasible, okay? That’s not something I can sit here and say that you can do it without violating state law.”
The hospital sales are a key issue to watch going forward as lenders vie for priority status to get paid.
Attorney Kris Hansen, who represented the asset-based lenders, pushed back on tying hospital sales to DIP financing and accused MPT of trying to ensure it gets paid first before all other lenders.
“This is an absolute land grab by MPT, Your Honor. There is no contract and no policy to which the debtors are a party that would compel this result. And it is going to be a hotly — if not the most hotly — contested issue among secured lenders, the creditors committee, MPT and myriad other creditors in these cases,” Hansen said.
