Mercy Iowa City bond trustee, representative object to cash collateral use

By Sarah Lizee

Olympia, Wash., Aug. 8 – Mercy Iowa City’s motion to use cash collateral drew an objection from master trustee Computershare Trust Co., NA and its affiliate, Preston Hollow Community Capital, Inc., according to documents filed Tuesday with the U.S. Bankruptcy Court for the Northern District of Iowa.

The trustee said the hospital has been on a path towards insolvency for the past several years, and in the last nine months its liquidity declined by about $40 million, representing a 51.5% drop.

“Yet, despite Mercy’s mounting financial distress, Mercy’s board of directors and management neglected to develop a plan to stem or reverse Mercy’s operating losses and revitalize its business,” Computershare said in the objection.

The trustee said Preston Hollow Community Capital, Mercy’s largest individual senior secured creditor, had asked Mercy’s board and management for months prior to the filing to formulate a turnaround plan for the hospital, and had offered to provide interim bridge financing to allow for Mercy’s continued operation and delivery of patient services while a plan was implemented.

Computershare said that when it became clear that Mercy’s liquidity was quickly approaching a level insufficient to maintain ongoing operations, it sought the appointment of a receiver over Mercy’s real and personal property assets that are subject to its liens and security interests.

“The hope was that a receiver could formulate and implement a turnaround plan for Mercy that would allow it to be rehabilitated, instead of liquidate, and continue to serve the Iowa City community as a full service acute care hospital,” Computershare said.

“Before a hearing could be held, however, and without discussion or collaboration with the master trustee or bondholder representative, the debtors filed the instant Chapter 11 cases.”

Through the cash collateral motion, the debtors seek authority to use the master trustee’s prepetition collateral on a nonconsensual basis.

Computershare said if the debtors have access to unencumbered cash and other assets of Mercy Hospital Foundation, a wholly owned subsidiary of Mercy whose purpose is to support Mercy’s health care mission, the debtors should be required to use those funds first before using the master trustee’s cash collateral.

And, the potential cash burn caused by the Chapter 11 cases is unwarranted and will cause an unnecessary and substantial decrease in the value of the prepetition collateral securing the bonds and related obligations, the trustee said.

Computershare also said it hasn’t been provided sufficient adequate protection through the proposed cash collateral order.

“While the Master trustee and bondholder representative understand and support the need for the debtors to maintain operations in order to maximize the value of their assets pending a sale process or reorganization in the Chapter 11 cases, such need does not excuse the debtors from satisfying the most basic and fundamental obligations related to the use of cash collateral – to demonstrate a need to use such cash collateral and to provide adequate protection,” the trustee said.

The Iowa City-based hospital filed Chapter 11 bankruptcy on Aug. 7 under case number 23-00623.

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