Steward Loses Money On Massachusetts Hospital Sales; CEO Snubs Senate

Steward Health Care received court approval to sell six of its Massachusetts hospitals for an aggregate price of $343 million during a contentious hearing Wednesday, effectively exiting operations in the state.

The health system will sell St. Anne’s Hospital and Morton Hospital to Rhode Island-based Lifespan Health System for $175 million; St. Elizabeth’s Medical Center and Good Samaritan Medical Center to Boston Medical Center for $140 million; and both Holy Family Hospital campuses to Lawrence General Hospital for $28 million.

However, the sale was far from a win for the bankrupt physician-owned network. Details from an incendiary letter penned by Steward CEO Ralph de la Torre, first published by the Boston Globe on Wednesday, threatened to overshadow the deal closure entirely. The executive said he would not comply with a subpoena to testify before a Senate subcommittee next week.

After purchase price adjustments and closing costs, the transactions will leave Steward approximately $17 million further in the hole, according to Candace Arthur, partner at Weil, Gotshal & Manges, who represented Steward during Wednesday’s sale hearing.

That’s because Apollo Global Management walked away with nearly all of the value. The private equity and asset management firm netted approximately $325 million from the transactions, according to asset purchase agreements.

Apollo now holds the mortgages for Steward’s Massachusetts hospitals, which are owned by Medical Properties Trust and Macquarie Infrastructure Partners. Earlier this summer, the firm held lengthy negotiations with Steward over how to allocate proceeds from sales between hospital operations and real estate.

Arthur told the court that despite the transaction’s “zero-dollar economics,” the debtors stand “fully behind the sale.”

She noted the sales will protect thousands of jobs and prevent hospital closures. The deals were also supported by the Massachusetts government, which has offered Steward a total of $72 million in emergency funding to cover hospital operations during August and September. 

However, the deals did not sail through. Steward’s “first in, last out” or FILO lenders — WhiteHawk Finance, Owl Creek Investments, MidOcean Credit Fund Management and Brigade Capital Management — objected to Steward selling the hospitals at a loss.

The lenders also act as the health system’s debtor-in-possession financiers, which offer Steward funds to operate through restructuring. The lenders have provided about $575 million in funds for Steward throughout the bankruptcy process and gave Steward $25 million as recently as last week, according to testimony from their attorney, Michael Price.

In exchange for funds, Steward promised its hospitals as collateral. Price told the court the Massachusetts deal undercuts the lenders’ ability to secure their loan. A particular sticking point in the deals was the buyers’ ability to assume liabilities in exchange for a lower price — the attorney argued those funds ought to have flowed directly into the estate.

“In sum, there’s $24.1 million being paid for inventory, $17.6 million paid for [fixtures, furniture, and equipment], under the [asset purchase agreement] — that’s undisputed,” Price said. “Zero dollars are coming into the estate. There’s zero consideration being provided to the secured lenders who have liened interest in that collateral.”

“We don’t want this sale to blow up unless it absolutely has to,” Price said. “But what they’re being asked to do is just a bridge too far.”

Still, after a pause to review the final deal terms — which were filed at nearly 4 a.m. Wednesday — U.S. Bankruptcy Judge Christopher Lopez approved the sale, with a few caveats.

Lopez decided to withhold about $17 million dollars from the sales — Steward’s funding shortfall. He will determine at a later date how to allocate those proceeds.

“This is the best deal that’s on the table, and that’s saying a lot,” Lopez said. “There’s been an extensive process. The Commonwealth has already put in an incredible amount of money to even get us to this point and [I’m] not subjecting [the hospitals] to risks while there are real people sitting in beds right now.”

The deal must be completed by Sept. 30 or buyers can terminate the deal, according to the asset purchase agreements. The deals are also subject to state and regulatory reviews.

Subpoena snub

Steward’s CEO stole the spotlight Wednesday when his lawyers wrote to the Senate Committee on Healthcare, Education, Labor and Pensions committee chair Sen. Bernie Sanders, I-Vt., to say de la Torre would not testify as scheduled next week.

The committee subpoenaed the executive in July, demanding he account for his role in Steward’s alleged financial mismanagement and collapse. The subpoena was the first of its kind in decades.

De la Torre asked to postpone his testimony until after federal bankruptcy proceedings end. His lawyers said the executive did not want to be party to a “pseudo criminal proceeding.”

Steward Health Care declined to comment on the executive’s choice not to testify next week.

Sanders swiftly condemned the move in a statement Wednesday, noting he was disappointed but not surprised.

“I am now working with members of the HELP Committee to determine the best path forward,” Sanders wrote. “But let me be clear: We will not accept this postponement. Congress will hold Dr. de la Torre accountable for his greed and for the damage he has caused to hospitals and patients throughout America. This Committee intends to move forward aggressively to compel Dr. de la Torre to testify to the gross mismanagement of Steward Health Care.”

Senators from Massachusetts, Edward Markey and Elizabeth Warren, called de la Torre’s defiance “outrageous,” and said they sought to hold him in contempt if he did not appear before Congress as requested.

Looking ahead

A sale hearing for its Space Coast Florida hospitals — Melbourne Regional Medical Center, Rockledge Regional Medical Center and Sebastian River Medical Center — is scheduled for Sept. 10. Nonprofit Orlando Health plans to purchase the facilities for $439 million. Unlike the Massachusetts deal, Steward expects to retain the value from the transaction and will use it to pay its lenders and creditors, according to an Aug. 30 press release.

Steward has also named Christus Health Ark-La-Tex, part of Irving, Texas-based Christus Health, as the stalking horse bidder for Texas-based Wadley Regional Medical Center on Sept. 3. Christus Health bid $4.5 million for the 123-bed facility. Other parties have until Sept. 13 to submit offers. A sale hearing is scheduled for Sept. 24. 

It also appears that Steward’s Ohio hospitals, which were slated for closure only weeks ago, may have a second shot at life.

Steward and MPT told the court on Aug. 30 they are brokering a deal for MPT to take over hospital operations at many Steward locations in exchange for the “mutual release of all claims on secured lease obligations between them, including the release of billions of dollars of claims held by MPT against Steward.”

Additional details will be published ahead of a Sept. 10 hearing.

Other deals are still far from closing. Sale hearings for Arizona have been adjourned to a later date and hearings for Arkansas and Louisiana — which were slotted for Sept. 4 — have been once again postponed to Sept. 10.

Correction: In a previous version of this article, the status of Steward’s Arkansas and Louisiana sale hearings was misstated. The hearings have been adjourned to Sept. 10.