Wed 09/08/2021 17:04 PM
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Relevant Documents:
Notice of Default (Sept. 8)
Quarterly Financials (Aug. 6)
Notice (April 5)
Official Statement
Issuer Homepage

Proton International at UAB, an outpatient proton therapy cancer treatment center located on the campus of the University of Alabama Hospital, an academic medical center owned and operated by the University of Alabama at Birmingham, has defaulted on its bond obligations, according to a notice posted to EMMA today. The proton therapy center is the obligor on $81.3 million in revenue bonds issued by the Wisconsin Public Finance Authority through a private placement.

According to the National Association of Proton Therapy, or NAPT, proton therapy is a type of cancer treatment that is argued to be more precise than conventional forms of radiation by using accelerated particles to treat cancerous tumors. The treatment, which obtained Food and Drug Administration approval in 1988, requires special machinery and is believed to cause less damage to healthy tissue along with other purported benefits compared with treatment alternatives.

However, despite its clinical benefits, proton treatment centers have struggled to find firm footing as a result of the pandemic, having seen precipitous drops in patient treatment levels. Further, despite the benefits of proton beam therapy, insurance companies frequently deny coverage for its use, opting instead to cover photon therapy, which is about two to three times less expensive, according to a 2014 ICER review. The primary medical equipment is also extremely expensive, estimated to cost about $20.3 million alone.

The offering statement indicates that at the time of issuance in 2017, 26 proton therapy centers existed and 11 were under construction in the United States. NAPT states that the number of centers is expected to increase drastically with an uptick in clinical trials. However, certain limitations imposed on the treatment by the Centers for Medicare & Medicaid, or CMS, restrict patient access by deeming only a handful of cancers medically necessary for the treatment. Further, CMS also modified its Medicare and Medicaid payment guidelines through its “radiation oncology model,” which has also further eroded proton therapy centers’ client base.

Two other proton therapy centers associated with the Wisconsin Public Finance Authority - Maryland Proton Treatment Center and South Florida Proton Therapy Institute - have failed to meet covenants under their respective bond documents. As of its most recent monthly financial report, Maryland Proton Treatment Center reported a debt service coverage ratio, or DSCR, for July of 0.4x and days cash on hand of 12. The center also disclosed in a July 1 notice posted to EMMA that it tapped its liquidity reserves in order to meet its debt service for July 1 on its $267.4 million in revenue bonds.

Similarly, the South Florida Proton Therapy Institute reported Aug. 5 that it had 26 days’ cash on hand. Additionally, the center is negotiating a forbearance agreement or waiver with the bond trustee and its lenders for failure to meet certain covenants on its $81.3 million in revenue bonds, according to its unaudited financials.

Proton therapy centers have also recently landed in bankruptcy, with a trio of centers seeking chapter 11 protection in the Bankruptcy Court for the Middle District of Tennessee in the In re MPTC, LLC cases.

Proton International at UAB

The bonds tied to Proton International UAB were issued in two series - $73.3 million in Series 2017A senior revenue bonds and $8 million in Series 2017B subordinated revenue bonds. The proceeds of the Series 2017 bonds were used to finance, construct and equip a proton therapy center, fund a debt service reserve fund for the Series 2017A bonds, fund an extraordinary expense fund for the authority and fund interest on the Series 2017A bonds through May 1, 2020, and interest on the Series 2017B bonds through Dec. 1, 2019. The proceeds would also provide working capital for the project. The bonds are secured by a security interest in gross operating revenue as well as a security interest in the manager collateral, which includes each collection account created in the name of the manager.

The official statement notes that payment debt service on the Series 2017A bonds is also secured by monies on deposit in a liquidity support fund established through a liquidity support agreement for $2 million between the bond trustee and the developer, Proton International Alabama, a subsidiary of Proton International.

According to today’s EMMA notice, the authority and Proton International Alabama believe that the indenture “incorrectly failed to identify a start date for calculation of the Debt Service Coverage Ratio.” Although the facility did not become operational and did not begin to generate revenue until March 11, 2020, the authority and the manager say that they believe the appropriate start date for calculating the DSCR is Dec. 31, 2021. Nevertheless, the notice provides quarterly DSCR calculations from March 31, 2018, through June 30, 2021:

The notice states that if the actual DSCR with respect to the senior bonds for any two consecutive quarters is less than the 1.4x debt service coverage requirement, the indenture requires the authority to cause the manager to select and appoint, with the approval of the owners, a medical consultant to make written recommendations as to the operation, management, marketing, improvement, condition or use of the project or any part of it that the medical consultant believes could result in satisfying the debt service coverage requirement or increasing the total net revenue available to pay debt service.

Proton International UAB has failed to achieve the DSCR requirement of 1.4x for two consecutive quarters, the notice states, adding that none of the manager, the authority or the trustee has selected or appointed a medical consultant. Further, there has been a failure to meet the DSCR of not less than 1x, which results in an event of default under the indenture.

The notice indicates that Proton International UAB has 122 days’ cash on hand as of June 30, which is less than the liquidity requirement of 200 days’ cash on hand under the indenture. A medical consultant is also required where such a covenant is not met, and because no such consultant has been appointed, an event of default exists under the indenture.

Proton International UAB previously failed to make interest payments on the subordinated bonds in April, with the company attributing this failure to insufficient cash flow.

The company’s unaudited financials for the year ended June 30 show a net patient revenue variance of $3.97 million, or a negative variance of 43.9%. Proton International UAB also posted an operating loss of $2.9 million, which was negative 184.4% off budget. Today’s notice states that the center opened on March 11, 2020, the date the World Health Organization declared Covid-19 a global pandemic.
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