AFS Distressed Hospital Task Force

Hospital Municipal Bonds Initiative

ArentFox Schiff’s hospital municipal bonds initiative brings together a multidisciplinary group of lawyers with extensive experience in tax-exempt hospital financings, restructurings, and workouts, and deep familiarity with health care regulatory issues, hospital M&A, and other complex issues in the hospital sector.

Our group has worked on structuring and restructuring of bonds financing hospitals, hospital closings and reconfigurations, health care regulatory issues, hospital mergers and acquisitions, and workouts and bankruptcies of distressed hospitals and other health care facilities. Our clients include bond trustees, holders of municipal bonds, other investors in the hospital sector, health care systems, academic medical centers, community hospitals, and hospital service providers.

Our approach is to be laser-focused on the business issues facing hospitals and proactive in working with bondholders and borrowers, relying on a nuanced understanding of the complex and evolving regulatory and reimbursement landscapes. Our deep bench of business-minded health care lawyers will develop a pragmatic framework for an effective resolution outside of bankruptcy. The team also has strong bankruptcy and restructuring experience to prepare for all contingencies.

The hospital sector is facing lower margins caused by increased supply costs and a tight labor market while adjusting to shifts in patient behavior since the onset of the Covid-19 pandemic.  Meanwhile, persistent market uncertainty has led to a decline in municipal bond refinancings and new issuances, causing distress to a number of hospital borrowers.

Mounting covenant breaches are one of the signs that the sector is in increasing distress. These breaches and the underlying distress are best addressed by a proactive two-prong approach.  First, there should be a focus on using the pre-default runway to pursue strategic initiatives such as affiliations, focusing on issues with non- or underperforming obligated group hospitals or joint ventures, and developing other business solutions.  Second, on a parallel track, legal solutions should be pursued through forbearance or document amendments, including improving the collateral package, addressing any issues with perfection or material document deficiencies, and establishing realistic and meaningful new appropriate financial covenants, operational thresholds, and consent rights.

Our Work

  • A community hospital system in New York finance and refinance the replacement of two antiquated hospitals with a $300 million replacement hospital, the first new hospital to be constructed in New York State in over 20 years. Representation included: the sale of non-core real estate assets; the sale/leaseback of a large medical office building to a commercial developer; application for and receipt of approximately $50 million in State grant funds to support the development of the replacement hospital and to retire debt associated with the existing hospitals; the retirement of outstanding debt on the existing hospitals; the sale/leaseback (during construction of replacement hospital) of the two antiquated hospital facilities to two separate newly created non-profit community development corporations; the long-term bond financing and refinancing of a portion of the costs of the replacement hospital and the long-term bond financing of a new medical office building on the replacement hospital campus.
  • A California community hospital finance a $250 million replacement hospital for seismic purposes.
  • A distressed inner city non-profit hospital in connection with a state-supported bond refinancing and with a health facility restructuring loan in connection with the hospital’s bankruptcy filing.
  • Community hospitals in the restructuring and refinancing of defaulted bond transactions.
  • A hospital located in one of the pandemic epicenters in New York City – designated as Level IV (highest level of hospital emergency in New York State) – in a major modernization project. Utilized bond financing and CARES Act monies including special COVID-19 reimbursement enhancements and sequester/health care reduction reversals, as well as special Medicare advances through CMS, all as additional support. Notable aspects include the first tax-exempt HUD mortgage-insured project in the country in 10 years, the release of multiple properties from existing HUD mortgage liens, the ability to substitute real estate for cash collateral, and SEC-recommended forward-looking disclosures in light of the pandemic.
  • Advised in connection with Chapter 11 bankruptcy and subsequent change of ownership for two inner-city hospitals.
  • Advised in connection with Chapter 7 bankruptcy and subsequent closure of a financially distressed hospital.

Key Contacts