Tue 05/07/2024 17:02 PM
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Relevant Documents:
Revised Proposed DIP Order

At a hearing today, the Steward Health Care debtors obtained all of their requested first day relief from Judge Christopher Lopez, including interim approval of $75 million in funding under a junior DIP facility from landlord Medical Properties Trust, or MPT. Judge Lopez overruled a limited objection from the ABL lenders.

Interim DIP approval unlocks $40 million of the facility. Debtors’ counsel Ray Schrock of Weil Gotshal said that Steward needs the funds to make payroll tomorrow. He also noted that he expects the debtors are “going to require additional DIP funds to manage these cases” in light of sale milestones that he believes are overly optimistic. MPT may lend an additional $225 million under the non-priming facility if the debtors meet sale milestones and other conditions.

Read Reorg’s live updates from the hearing HERE.

The ABL lenders opposed language in the interim DIP order that their counsel, Kristopher Hansen of Paul Hastings, described as an “absolute land grab by MPT.” Specifically, Hansen noted that the DIP term sheet would require sale proceeds from hospital sales to be paid first to MPT to cover MPT’s “lease base” and deferred rent. The interim order also provides that if the sales proceeds “don’t reach that number, [MPT would] receive a junior secured claim” for the deficiency, Hansen pointed out.

Hansen argued that allocation of sale proceeds “will be the most hotly contested issue” in the case. “You should not approve this DIP” if MPT refuses to lend without assurance that it would be paid first from sale proceeds, he told the court. Michael Price of Milbank, speaking for the first-in, last-out lenders, also said, “These provisions should go.”

In response, Thomas Patterson of KTBS, appearing for MPT, stressed the unitary nature of the MPT leases. He explained that the debtors’ hospitals were each subject to one of two MPT master leases. The unitary lease structure means a location “cannot be served without MPT consent,” and, according to Patterson, the issue of “what circumstances and how MPT would consent to severance of a facility” in the context of a sale has created a “Gordian knot that we have to try to figure out.”

Patterson explained that the DIP sale proceeds allocation mechanism is an attempt to address that issue. If the landlord consents to a sale but does not receive a full recovery under the lease, “it wants something in exchange for the loss,” and “that’s what the secured claim is.”

Ultimately, Judge Lopez approved the DIP financing on an interim basis after Schrock assured him that “we’re not going to close any sales between now and the final hearing.”

“A representation on an interim basis that this provision isn’t going to get implicated? That’s what I needed to know,” the judge remarked. “Everybody knows we’re going to cross this bridge when we get to it.”

Judge Lopez scheduled the second day hearing for June 3 at 2 p.m. ET, with objections due May 28. “There’s more to come,” the judge said, urging the parties to negotiate between now and the final DIP hearing.

Schrock explained that the debtors have two business lines: Stewardship Health, which contracts with primary care service providers, and Steward Health, which is the “hospital side” of the business. Schrock reiterated that the company intends to run an all-asset sale in chapter 11. He said that the debtors will work with stakeholders to reorganize hospitals that cannot be sold, and “our goal is that zero hospitals are closed.”

In the first day papers, Steward said that it has executed a letter of intent and is in “advanced discussions” with Collaborative Care Holdings LLC, an affiliate of UnitedHealth Group, to act as a stalking horse purchaser for the Stewardship Health business.

The Massachusetts Health Policy Commission announced Collaborative Care’s proposed acquisition in March. Yesterday, the commission said that it has begun examining the proposed sale, but “the parties have still not submitted key required information, and many details are still outstanding.” Steward’s material change notice filing with the state is “not complete,” the commission says, “until the HPC receives the definitive agreement governing the transaction” and other information.

The commission notes that after receiving the agreement it would have 30 days to determine whether to conduct a more comprehensive cost and market impact review, or CMIR. “If required, a CMIR is approximately a six-month process,” the commission said.

Describing the debtors’ sale approach, Schrock signaled that the company is not entirely aligned with MPT. He remarked, “I’m not going to say we’re happy with the timeline we had to agree to to get financing.” Steward Health’s DIP milestones include a June 25 bid deadline for first round hospitals, meaning all of the debtors’ hospitals other than those in Florida, followed by an auction by June 28 and a sale hearing by July 2. Schrock warned, “You can’t close these hospital sales by the end of June. It’s not feasible. You can’t do it without violating state laws.”

That was a sentiment Hugh McDonald of Pillsbury Winthrop, appearing for the Massachusetts Executive Office of Health and Human Services, was glad to hear. “We are happy to hear he wants to work with us,” McDonald said, adding that he appreciated the debtors’ recognition that the “state has a regulatory role here regardless of timeline.”

Schrock called the milestones related to Steward’s second round hospitals in Florida “a little more realistic.” That timetable requires a July 26 bid deadline, an auction by July 30 and a sale hearing by Aug. 2. The debtors have to emerge from chapter 11 quickly but “within the confines of the regulatory regime,” Schrock noted.

The court also heard from David Hillman of Proskauer Rose for Brighton Marine, a Massachusetts not-for-profit that focuses on providing healthcare and housing to active and retired military personnel. Hillman told Judge Lopez that Brighton Marine is one of six companies that “directly contracts with the Department of Defense to get benefits” to military personnel and that Steward “subcontracted with Brighton Marine since 2012.”

Under the arrangement, Hillman explained, Brighton receives money from the Department of Defense and pays Steward, which sources medical service providers for active duty and veteran members of the military. Steward bears all the risk of loss in the event government funds are insufficient to pay medical providers, and it is also entitled to keep any surplus, Hillman explained.

Hillman alleged that Steward “stonewalled” his client on prepetition information requests. Brighton and several government entities sued the debtors in April, Hillman said, and ultimately Brighton terminated its contract with Steward. Hillman told the court that Brighton will file an adversary proceeding against Steward seeking specific performance to ensure relevant subcontracts are transferred.

“We will pick up the phone and try to resolve without judicial intervention,” Hillman said, but “don’t know if we will get there.”

Megan Young-John of Porter Hedges spoke for CareMax, which acquired Steward’s Medicare value-based care business in 2022. She maintained that DIP liens should not attach to about $9.2 million of cash from the Centers for Medicare and Medicaid Services that was “inadvertently swept” from CareMax’s accounts prepetition and opposed the use of the funds as cash collateral. She pressed for the segregation of the funds, a request the debtors refused.

David Cohen of Weil said that if CareMax is correct that the funds are not estate property, then DIP liens will not attach to them. “I don’t think anyone should read the order as granting a lien on something that’s not estate property,” Judge Lopez said.
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