Mercy Iowa City gets approval to sell hospital to University of Iowa

By Sarah Lizee

Olympia, Wash., Nov. 7 – Mercy Iowa City received approval to sell its hospital and clinic assets to the University of Iowa following a prolonged auction process, according to an order filed Tuesday with the U.S. Bankruptcy Court for the Northern District of Iowa.

As previously reported, the company had originally entered into a stalking horse agreement with the university that provided for a purchase price of $20 million.

Following an auction that ended Oct. 10, the company announced that it had designated a $27.8 million credit bid submitted by investors led by Preston Hollow Community Capital, Inc. as bondholder representative, alongside its operational partner, American Health Systems (AHS), as a 501(c)(3) operator, as the winning bid.

However, after the company announced the results of the auction, the debtors engaged in negotiations with the bondholder representatives and AHS regarding an amended asset purchase agreement, an interim management agreement providing for AHS to take over interim management of the debtors as of Nov. 15, and a funding agreement to provide for funding of operating losses consistent with the bondholder representatives’ bid.

Mercy Iowa City said that during these negotiations, the bondholder representatives took the position – to the surprise of the debtors and the official committee of unsecured creditors – that the funding commitments for operating losses incurred after Nov. 30 would be subject to first using all of the debtors’ cash on hand and funds available from Mercy Hospital Foundation, an amount that could approach, or potentially exceed, $10 million.

The debtor said the operating loss commitment was a crucial term that the debtors weighed in evaluating the bids.

Mercy Iowa City said that in the absence of an operating loss commitment – a commitment to backstop the debtors’ operating losses without requiring the debtors to obtain liquidity from assets beyond its operations – the debtors and the committee believed that the last bid submitted by the bondholder representatives was materially lower than the last bid by the university.

The debtors were also unable to reach final agreement on the funding arrangement or the interim management agreement. And, to the debtors’ knowledge, the bondholder representatives had not reached agreement with AHS on a definitive agreement to allow AHS to operate the hospital.

Following those discussions, the auction was reopened on Oct. 27, and the university’s bid was declared the highest and best bid for the assets.

The university’s final bid consisted of $28 million, plus an amount equal to the debtors’ actual operating losses exclusive of professional fees and all other costs and expenses relating to the bankruptcy that are not already otherwise covered by the debtors’ cash and other investments for the period starting Dec. 1 and continuing until the transaction closes, as well as a commitment to invest at least $25 million within five years of the transaction closing on information technology and physical plant infrastructure at the hospital.

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

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