Watsonville Hospital Corporation
CASE SUMMARY: Watsonville Community Hospital to Sell Assets With Stalking Horse Poised to Take Over Hospital Operations if California Approves Funding, Permits
Mon 12/06/2021 16:51 PM
Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
Watsonville, Calif.-based Watsonville Hospital Corp., operating the Watsonville Community Hospital, which serves a “primarily agricultural area” and a “historically underserved and less affluent population” in Watsonville, Freedom, Aptos, Moss Landing, Aromas and Castroville, filed for chapter 11 protection on Sunday, Dec. 5 in the Bankruptcy Court for the Northern District of California.
According to the first day declaration of the company’s CRO, Jeremy Rosenthal of Force Ten Partners, the debtors’ goals in these cases are “first and foremost, to maintain the Hospital’s operations so that it can continue to provide critical healthcare to the community while also saving approximately 650 jobs; second, to successfully sell the Hospital to a buyer that can support the healthcare needs of the community in a value maximizing transaction; and third, to confirm a plan of reorganization for the Debtors.”
“However,” Rosenthal says, “if the Debtors cannot consummate a sale of the Hospital within the time allotted in the DIP Loan Documents and are unable to secure alternate funding for the Hospital’s operations and repayment of the DIP Facility; then, the Debtors will be compelled to seek authority to commence an orderly closure of the Hospital and the suspension of its licenses.”
The debtors have negotiated a “potential sale transaction” with Pajaro Valley Healthcare District Project based on a Dec. 3 term sheet, through which Pajaro has agreed to act as stalking horse for the hospital as a going concern and prepetition secured lender MPT has agreed to provide DIP financing pending sale consummation. Pajaro would fund operations of the hospital and other administrative obligations after March 31, 2022. The sale is conditioned on legislative authorization for the formation of the Pajaro Valley Healthcare District (a to-be-formed political subdivision of the State of California) to participate as the buyer and thereafter provide for the operation of the hospital.
The debtors seek approval of DIP financing from MPT in the amount of $30.75 million, that “contemplates the advance of up to $21,500,000 of ‘new’ money.” The DIP also contemplates a rollup of MPT’s prepetition bridge loans (totaling $9.25 million).
The first day hearing is scheduled for Tuesday, Dec. 7, at 12:30 p.m. ET.
The company’s prepetition capital structure includes:
The company says it “faced substantial operating difficulties and negative cash flows” since the acquisition, “if not earlier,” of Watsonville Hospital Corp from Quorum Health Corp. and QHC California Holdings (described more fully below) in 2019. These difficulties were only made worse by the Covid-19 pandemic. The hospital lost approximately $32.5 million this year, with most of the losses funded by advances from MPT.
The debtors are represented by Pachulski Stang Ziehl & Jones in San Francisco as counsel and Cowen and Co. as investment banker. Jeremy Rosenthal of Force Ten Partners is the CRO. Stretto is the claims agent. The case has been assigned to Judge M. Elaine Hammond (the jointly administered case number is 21-51477).
Background
Watsonville Community Hospital, which first opened in 1895 as a five-room sanitarium founded by Dr. P.K. Watters, serves a primary service area encompassing Watsonville and the California towns of Freedom, Aptos, Moss Landing, Aromas and Castroville and a population of approximately 140,000 people. The hospital has 106 licensed beds and offers a 24-hour emergency department (the only one within an approximately 30 minute radius, according to the debtors), outpatient and inpatient surgical services, obstetrics, neonatal intensive care, hyperbaric therapies, diagnostic, therapeutic, and rehabilitative services and community education.
The debtors have approximately 650 employees, “making the Hospital one of the three largest employers in Watsonville.” Over 75% of the hospital’s workforce is represented by one of four labor unions, as follows:
The hospital was acquired by the debtors in May 2019 from Quorum Health Corp. in an equity transaction. In connection with the acquisition, the debtors entered into the prepetition financing arrangements with MPT of Watsonville Lender LLC as lender and the lease agreement with MPT of Watsonville LLC as lessor. In October 2019, the debtors and Halsen Healthcare entered into a management services agreement pursuant to which Halsen agreed to perform certain management and administrative services for the debtors. Pursuant to a subordination of management agreement, Halsen agreed (i) to subordinate any liens or rights to payment under the Halsen MSA to liens and rights to payment owed to MPT and (ii) that after the occurrence of an uncured event of default under the MPT lease and/or MPT secured note, MPT would have the right to terminate, or cause the debtors to terminate, the Halsen MSA.
In January 2021, having previously sent a series of default notices to the debtors, MPT gave written notice to the hospital of its immediate exercise of certain proxy voting and consent rights granted to MPT by the pledgors, consisting of non-debtor Halsen Holdings (the ultimate corporate parent of the debtors’), Halsen Holdings’ members and debtors Halsen Healthcare and Watsonville Hospital Holdings. On that date, pursuant to written consents executed under the proxy rights, MPT removed the then existing directors and managers of WHC, Halsen Healthcare and Watsonville Hospital Holdings and named Frank R. Williams and Jeremy Rosenthal (the first day declarant) as independent directors and managers of debtors Watsonville Hospital Holdings, Halsen Healthcare, and Watsonville Hospital Corp. Thereafter, in February, MPT removed the existing managers of debtor Watsonville Healthcare Management and appointed Williams and Rosenthal as its independent managers. In September, Rosenthal resigned as director and manager of the debtors, replaced by David J. Gordon. The newly-constituted boards then appointed Rosenthal as the CRO of the debtors.
The company’s corporate organizational structure follows:
The debtors’ largest unsecured creditors are listed below:
The case representatives are as follows:
Stalking Horse Term Sheet
The term sheet with Pajaro provides that it would purchase substantially all of the debtors’ assets, for a purchase price of (a) “the amounts then due under the DIP Loans” (including the bridge prepetition loan of $3.5 million, but excluding other prepetition loans of $5.75 million) up to $25 million, plus (b) “any additional consideration specified in the Stalking Horse APA,” plus (c) assumption of liabilities, plus (d) $9 million to be paid to MPT on account of its secured claim against the debtors’ personal property assets and upon MPT’s release of its security interests in the debtors’ personal property assets being sold pursuant to the stalking horse APA from proceeds of the stalking horse APA. MPT’s remaining rolled up DIP loans in the principal amount of $5.75 million, together with interest and expenses, would remain as outstanding administrative claims. To the extent that the acquisition does not close by March 31, Pajaro would be responsible for payment to MPT of any “simple interest” that accrues after March 31 “under the DIP Loans (excluding the Other Prepetition Loans) pending the closing of the Acquisition.”
The Pajaro Valley Healthcare District would take assignment of a lease between MPT Lessor and Watsonville Hospital Corp, providing that the lease would be assigned on existing terms except that (a) the monthly lease amount would be $250,000 through Dec. 31, 2025 (after which the escalation provisions of the lease apply) and (b) Pajaro Valley Healthcare District would be entitled to exercise the option to purchase the property on 90 days prior notice (with an option price “(A) equal to the greater of (1) the Fair Market Value Purchase Price of the Leased Property, and (2) the Lease Base, or (B) $40,000,000 solely to the extent Lessee notifies Lessor of its intent to exercise such option upon no less than 90 days prior written notice and closes on the purchase of the Leased Property on or before December 31, 2025.”
The acquisition is conditioned on Pajaro obtaining (a) legislative authorization for the formation of the Pajaro Valley Healthcare District to participate as the buyer and thereafter provide for the operation of the hospital, (b) State of California funding and tax-exempt debt to consummate the purchase and (d) license and other operating approvals no later than Aug. 31.
The stalking horse would be entitled to an expense reimbursement up to $500,000.
The term sheet includes case milestones consistent with the DIP financing milestones (described below).
DIP Financing Motion
The debtors seek approval of a $30.75 multi-draw term loan DIP financing from prepetition secured lender MPT. The debtors request $16 million on an interim basis, with an initial amount of $6 million to be funded one day after entry of the interim order. The DIP consists of $21.5 million of new money and a rollup of $9.25 million in emergency prepetition advances.
The DIP financing bears interest at 10% and matures on the earlier of Aug. 31, 2022, or other customary events. “From and after April 1, 2022, on the first day of each calendar month until the Maturity Date, the Debtors shall pay to the DIP Lender all interest accrued on the Loans, excluding the Excluded Loans,” according to the motion.
To secure the DIP financing, the debtors propose to grant priming liens but say that the only party being primed is the DIP lender MPT in its capacity as prepetition lender. The debtors propose a lien on avoidance action proceeds subject to the final order.
The company proposes the following adequate protection to MPT: replacement liens, an allowed superpriority administrative expense claim and accrual of interest at the default rate from and after the petition date if it is “later determined by Court order that the MPT Lender was oversecured.” Adequate protection for CNH would be in the form of repayment of its obligations with the “CNH Priority Collateral” from ongoing receipts pursuant to a budget until the obligations are paid in full.
In addition, subject to the final order, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).
The carveout for professional fees is $200,000.
The proposed budget for the use of the DIP facility is HERE.
The DIP financing is subject to the following milestones:
The lien challenge deadline is 60 days from appointment of an official committee of unsecured creditors (but no later than 75 days after entry of an interim order), or if no committee is appointed, 75 days from entry of the interim order. The UCC lien investigation budget is $25,000.
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
| Summary |
| Watsonville Community Hospital has 106 licensed beds and serves an agricultural area that is “historically underserved and less affluent” |
| Seeks to run a sale process; entered into term sheet with Pajaro Valley Healthcare District Project as stalking horse to buy the hospital as a going concern |
| Prepetition secured lender to provide DIP financing of $30.75 million, including $21.5 million of new money and a rollup of prepetition emergency advances |
Watsonville, Calif.-based Watsonville Hospital Corp., operating the Watsonville Community Hospital, which serves a “primarily agricultural area” and a “historically underserved and less affluent population” in Watsonville, Freedom, Aptos, Moss Landing, Aromas and Castroville, filed for chapter 11 protection on Sunday, Dec. 5 in the Bankruptcy Court for the Northern District of California.
According to the first day declaration of the company’s CRO, Jeremy Rosenthal of Force Ten Partners, the debtors’ goals in these cases are “first and foremost, to maintain the Hospital’s operations so that it can continue to provide critical healthcare to the community while also saving approximately 650 jobs; second, to successfully sell the Hospital to a buyer that can support the healthcare needs of the community in a value maximizing transaction; and third, to confirm a plan of reorganization for the Debtors.”
“However,” Rosenthal says, “if the Debtors cannot consummate a sale of the Hospital within the time allotted in the DIP Loan Documents and are unable to secure alternate funding for the Hospital’s operations and repayment of the DIP Facility; then, the Debtors will be compelled to seek authority to commence an orderly closure of the Hospital and the suspension of its licenses.”
The debtors have negotiated a “potential sale transaction” with Pajaro Valley Healthcare District Project based on a Dec. 3 term sheet, through which Pajaro has agreed to act as stalking horse for the hospital as a going concern and prepetition secured lender MPT has agreed to provide DIP financing pending sale consummation. Pajaro would fund operations of the hospital and other administrative obligations after March 31, 2022. The sale is conditioned on legislative authorization for the formation of the Pajaro Valley Healthcare District (a to-be-formed political subdivision of the State of California) to participate as the buyer and thereafter provide for the operation of the hospital.
The debtors seek approval of DIP financing from MPT in the amount of $30.75 million, that “contemplates the advance of up to $21,500,000 of ‘new’ money.” The DIP also contemplates a rollup of MPT’s prepetition bridge loans (totaling $9.25 million).
The first day hearing is scheduled for Tuesday, Dec. 7, at 12:30 p.m. ET.
The company’s prepetition capital structure includes:
- Secured debt:
- MPT of Watsonville Lender LLC: $40.1 million
- CNH Finance Fund I, L.P.: $5.6 million
- MPT of Watsonville Lender LLC: $40.1 million
- Unsecured debt:
- Trade debt: $19 million
- Trade debt: $19 million
The company says it “faced substantial operating difficulties and negative cash flows” since the acquisition, “if not earlier,” of Watsonville Hospital Corp from Quorum Health Corp. and QHC California Holdings (described more fully below) in 2019. These difficulties were only made worse by the Covid-19 pandemic. The hospital lost approximately $32.5 million this year, with most of the losses funded by advances from MPT.
The debtors are represented by Pachulski Stang Ziehl & Jones in San Francisco as counsel and Cowen and Co. as investment banker. Jeremy Rosenthal of Force Ten Partners is the CRO. Stretto is the claims agent. The case has been assigned to Judge M. Elaine Hammond (the jointly administered case number is 21-51477).
Background
Watsonville Community Hospital, which first opened in 1895 as a five-room sanitarium founded by Dr. P.K. Watters, serves a primary service area encompassing Watsonville and the California towns of Freedom, Aptos, Moss Landing, Aromas and Castroville and a population of approximately 140,000 people. The hospital has 106 licensed beds and offers a 24-hour emergency department (the only one within an approximately 30 minute radius, according to the debtors), outpatient and inpatient surgical services, obstetrics, neonatal intensive care, hyperbaric therapies, diagnostic, therapeutic, and rehabilitative services and community education.
The debtors have approximately 650 employees, “making the Hospital one of the three largest employers in Watsonville.” Over 75% of the hospital’s workforce is represented by one of four labor unions, as follows:
The hospital was acquired by the debtors in May 2019 from Quorum Health Corp. in an equity transaction. In connection with the acquisition, the debtors entered into the prepetition financing arrangements with MPT of Watsonville Lender LLC as lender and the lease agreement with MPT of Watsonville LLC as lessor. In October 2019, the debtors and Halsen Healthcare entered into a management services agreement pursuant to which Halsen agreed to perform certain management and administrative services for the debtors. Pursuant to a subordination of management agreement, Halsen agreed (i) to subordinate any liens or rights to payment under the Halsen MSA to liens and rights to payment owed to MPT and (ii) that after the occurrence of an uncured event of default under the MPT lease and/or MPT secured note, MPT would have the right to terminate, or cause the debtors to terminate, the Halsen MSA.
In January 2021, having previously sent a series of default notices to the debtors, MPT gave written notice to the hospital of its immediate exercise of certain proxy voting and consent rights granted to MPT by the pledgors, consisting of non-debtor Halsen Holdings (the ultimate corporate parent of the debtors’), Halsen Holdings’ members and debtors Halsen Healthcare and Watsonville Hospital Holdings. On that date, pursuant to written consents executed under the proxy rights, MPT removed the then existing directors and managers of WHC, Halsen Healthcare and Watsonville Hospital Holdings and named Frank R. Williams and Jeremy Rosenthal (the first day declarant) as independent directors and managers of debtors Watsonville Hospital Holdings, Halsen Healthcare, and Watsonville Hospital Corp. Thereafter, in February, MPT removed the existing managers of debtor Watsonville Healthcare Management and appointed Williams and Rosenthal as its independent managers. In September, Rosenthal resigned as director and manager of the debtors, replaced by David J. Gordon. The newly-constituted boards then appointed Rosenthal as the CRO of the debtors.
The company’s corporate organizational structure follows:
The debtors’ largest unsecured creditors are listed below:
| 15 Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Amount |
|---|---|---|---|
| California Nurses Association | Oakland, Calif. | Employee Obligations |
$ Unliquidated |
| California Technical Employees' Coalition |
Watsonville, Calif. | Employee Obilgations |
Unliquidated |
| Service Employees International Union United Healthcare Workers |
San Francisco | Employee Obligations |
Unliquidated |
| General Teamsters Local 912 |
Watsonville, Calif. | Employee Obligations |
Unliquidated |
| Meritain Health Inc. | Amherst, N.Y. | Employee Obligations |
Unliquidated |
| Principal Financial Group | Des Moines, Iowa | Employee Obligations |
Unliquidated |
| QHCCS LLC Retirement Committee |
Brentwood, Tenn. | Employee Obligations |
Unliquidated |
| Health Trust Workforce Solutions LLC |
Atlanta | Trade | 2,908,136 |
| Guidehouse Managed Services Inc. |
Chicago | Trade | 1,334,160 |
| Pacific Gas & Electric | Sacramento, Calif. | Utilities | 1,068,877 |
| Lucile Packard Children Hospital c/o Johnson Center |
Palo Alto, Calif. | Trade | 929,508 |
| Emergency Medical Services Authority |
Rancho Cordova, Calif. | Trade | 788,914 |
| Firm Revenue Cycle Management |
Las Vegas | Trade | 557,252 |
| Stryker Orthopaedics | Chicago | Trade | 529,902 |
| ASD Healthcare | Chicago | Trade | 474,760 |
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Counsel | Debra I. Grassgreen | Pachulski Stang Ziehl & Jones |
San Francisco |
| Maxim B. Litvak | |||
| Steven W. Golden | |||
| Debtors' Investment Banker |
N/A | Cowen | N/A |
| Debtors' CRO | Jeremy Rosenthal | Force Ten Partners |
Irvine, Calif. |
| Debtors' Claims Agent |
Sheryl Betance | Stretto | Irvine, Calif. |
| Counsel to CNH | Shane J. Moses | Foley & Lardner | San Francisco |
| Edward J. Green | Chicago | ||
| Co-Counsel to MPT | Thomas O. Kolb | Baker, Donelson, Bearman, Caldwell & Berkowitz |
Birmingham, Ala. |
| Co-Counsel to MPT | Thomas E. Patterson | KTBS Law | Los Angeles |
| Counsel to Pajaro Valley Healthcare District Project |
Jonathan R. Doolittle | Pillsbury Winthrop Shaw Pittman |
San Francisco |
| Gerry Hinkley | Los Angeles | ||
| Claire K. Wu | |||
Stalking Horse Term Sheet
The term sheet with Pajaro provides that it would purchase substantially all of the debtors’ assets, for a purchase price of (a) “the amounts then due under the DIP Loans” (including the bridge prepetition loan of $3.5 million, but excluding other prepetition loans of $5.75 million) up to $25 million, plus (b) “any additional consideration specified in the Stalking Horse APA,” plus (c) assumption of liabilities, plus (d) $9 million to be paid to MPT on account of its secured claim against the debtors’ personal property assets and upon MPT’s release of its security interests in the debtors’ personal property assets being sold pursuant to the stalking horse APA from proceeds of the stalking horse APA. MPT’s remaining rolled up DIP loans in the principal amount of $5.75 million, together with interest and expenses, would remain as outstanding administrative claims. To the extent that the acquisition does not close by March 31, Pajaro would be responsible for payment to MPT of any “simple interest” that accrues after March 31 “under the DIP Loans (excluding the Other Prepetition Loans) pending the closing of the Acquisition.”
The Pajaro Valley Healthcare District would take assignment of a lease between MPT Lessor and Watsonville Hospital Corp, providing that the lease would be assigned on existing terms except that (a) the monthly lease amount would be $250,000 through Dec. 31, 2025 (after which the escalation provisions of the lease apply) and (b) Pajaro Valley Healthcare District would be entitled to exercise the option to purchase the property on 90 days prior notice (with an option price “(A) equal to the greater of (1) the Fair Market Value Purchase Price of the Leased Property, and (2) the Lease Base, or (B) $40,000,000 solely to the extent Lessee notifies Lessor of its intent to exercise such option upon no less than 90 days prior written notice and closes on the purchase of the Leased Property on or before December 31, 2025.”
The acquisition is conditioned on Pajaro obtaining (a) legislative authorization for the formation of the Pajaro Valley Healthcare District to participate as the buyer and thereafter provide for the operation of the hospital, (b) State of California funding and tax-exempt debt to consummate the purchase and (d) license and other operating approvals no later than Aug. 31.
The stalking horse would be entitled to an expense reimbursement up to $500,000.
The term sheet includes case milestones consistent with the DIP financing milestones (described below).
DIP Financing Motion
The debtors seek approval of a $30.75 multi-draw term loan DIP financing from prepetition secured lender MPT. The debtors request $16 million on an interim basis, with an initial amount of $6 million to be funded one day after entry of the interim order. The DIP consists of $21.5 million of new money and a rollup of $9.25 million in emergency prepetition advances.
The DIP financing bears interest at 10% and matures on the earlier of Aug. 31, 2022, or other customary events. “From and after April 1, 2022, on the first day of each calendar month until the Maturity Date, the Debtors shall pay to the DIP Lender all interest accrued on the Loans, excluding the Excluded Loans,” according to the motion.
To secure the DIP financing, the debtors propose to grant priming liens but say that the only party being primed is the DIP lender MPT in its capacity as prepetition lender. The debtors propose a lien on avoidance action proceeds subject to the final order.
The company proposes the following adequate protection to MPT: replacement liens, an allowed superpriority administrative expense claim and accrual of interest at the default rate from and after the petition date if it is “later determined by Court order that the MPT Lender was oversecured.” Adequate protection for CNH would be in the form of repayment of its obligations with the “CNH Priority Collateral” from ongoing receipts pursuant to a budget until the obligations are paid in full.
In addition, subject to the final order, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).
The carveout for professional fees is $200,000.
The proposed budget for the use of the DIP facility is HERE.
The DIP financing is subject to the following milestones:
The lien challenge deadline is 60 days from appointment of an official committee of unsecured creditors (but no later than 75 days after entry of an interim order), or if no committee is appointed, 75 days from entry of the interim order. The UCC lien investigation budget is $25,000.
Other Motions
The debtors also filed various standard first day motions, including the following:
- Motion for joint administration
- The cases will be jointly administered under case no. 21-51477.
- Notice of complex chapter 11 case designation
- Motion to pay employee wages and benefits
- The debtors seek approval to pay employee obligations as follows:
- The debtors seek approval to pay employee obligations as follows:
- Motion to use cash management system
- The company has bank accounts with Bank of America, Wells Fargo, Farmers & Merchants and U.S. Bank.
- Motion to maintain insurance programs
- Motion to provide utilities with adequate assurance
- Motion for creditor matrix consolidation and creditor privacy
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