The restructuring of the Gainesville Hospital District (District) in Texas was a complex, interdisciplinary matter that involved several precedential components. Specifically, the transaction involved a complete restructuring of approximately US$40 million of debt through the issuance of taxable refunding bonds secured by ad valorem taxes.
In order to effectuate the transaction, the District, which primarily serves about two-thirds of Cooke County, 70 miles north of Dallas, relied on its professionals to implement an innovative strategy merging finance, public finance law and bankruptcy law. After several months of discussions among the District’s professionals and the State of Texas Attorney General’s public finance and bankruptcy divisions, the complex legal and financial structure was preliminarily approved with the support of the Attorney General’s office.
The District then proceeded to commence the Chapter 9 bankruptcy proceeding and shortly thereafter filed a bond validation suit as an adversary proceeding in bankruptcy court to validate the District’s proposed issuance of debt to restructure its outstanding liabilities. With approval of the bankruptcy court and the support of the Attorney General’s office, the District then issued multiple series of taxable bonds in accordance with the validation judgment and the plan of finance.
Proceeds from the various bond issuances were used to refinance existing tax-exempt debt and other obligations and liabilities of the District, including the District’s Debtor-in-Possession (DIP) loan, pre-petition and post-petition obligations, pension liabilities, Medicare obligations and obligations set by the US Department of Justice's Office of Inspector General.
The bond validation suit that was filed in bankruptcy court represented the first time a bond validation suit has been filed outside of a Texas District Court and paved the way for a unique restructuring that required approvals from the bankruptcy court and the Texas Attorney General’s office.
Upon obtaining a final judgment in the bond validation suit, the District issued three separate tranches of interim bond debt while in bankruptcy before successfully emerging from bankruptcy. Additionally, pursuant to the final Plan of Adjustment approved by the bankruptcy court, the District issued a final series of “take out” bonds underwritten by J.P. Morgan to refinance the interim bonds issued during the bankruptcy case, and ultimately, concluded the restructuring transaction.
Norton Rose Fulbright US LLP served as the District’s bankruptcy, litigation and financial restructuring counsel, McCall, Parkhurst & Horton LLP served as the District’s bond counsel and Reed, Claymon, Meeker & Hargett, PLLC served as the District’s outside general counsel on the transactions. Hilltop Securities (Hilltop) served as strategic advisor and financial advisor to the District on its strategic operational outsourcing initiative and the resulting debt restructuring transactions.
J.P. Morgan initially purchased all of the interim bonds issued in limited offering transactions during the bankruptcy case and also served as underwriter on the final “take out” bond transaction. J.P. Morgan was advised by Bracewell LLP and Chapman and Cutler LLP.
In 2016, after several years of consecutive and growing operating losses, the District’s board found itself in a position that it would either need to raise local operating taxes materially or contract with a larger outside network for operations. The District’s board engaged Hilltop in a strategic advisory role to evaluate potential outsourcing operations. The primary goal of outsourcing the operation of the hospital was to remove operating risk from the taxpayer. The board was willing to maintain current taxing levels, but explicitly did not want to increase the current level of operating tax support.
Towards the end of 2016 and in early 2017, Hilltop worked with District staff to analyze the working capital sufficiency and operational resources. Based on this analysis it was determined that the District would run out of liquid working capital within 60 days. Over the days and weeks prior to the filing of the Chapter 9 petition, the District was not generally paying its debts as they became due and was technically insolvent. Norton Rose Fulbright and Hilltop formulated a strategy for the District to enter into Chapter 9 bankruptcy, secure DIP financing and file a bond validation suit that would pave the way for the District to legally verify all of its pre-petition and post-petition liabilities under State Law. In executing this strategy, the District used non-voted general obligation bonds as the “permanent financing” vehicle to refinance and restructure all of the District’s outstanding obligations and liabilities.
The commencement of the bankruptcy case provided the District with much-needed breathing space and economic stability to negotiate and confirm its Plan of Adjustment for its past debts and alleged liabilities. In addition to immediately securing DIP financing, the District’s professionals also resolved the District’s Medicare and OIG compliance issues, formally wrapped up and terminated the District’s defined pension plan (which was significantly underfunded when the bankruptcy case commenced) and negotiated an interim operating arrangement with Community Hospital Corporation (CHC) to provide management services for the hospital. The District successfully confirmed its Plan of Adjustment in November 2018, allowing the District to formally emerge from bankruptcy on December 1, 2018.
Prior to the bankruptcy filing and strategic lease initiative, the District maintained bond ratings with Moody’s Investors Service and Fitch rating agencies. The District’s professionals worked with the District to keep the rating agencies informed of the bankruptcy plan and status of the interim financings. Through the bankruptcy process the District utilized the Fitch rating agency to rate its general obligation interim debt. Furthermore, CHC restored monthly hospital operations into a positive cash flow status. Working with Fitch, the District was able to benefit from the Special Revenue status granted its general obligation bonds and thereby maintained a strong, investment grade rating by Fitch. The investment grade rating also allowed the District to monitor the market level cost of capital for its ultimate “take-out” bond issue and thereby model the debt maturity structure necessary to achieve its desired final tax rate impact.
Summary issues chart
|District cash rapidly depletes leaving less than 60 days of working capital||Negotiated receivables secured bank loan to extend the operational working capital.||District was able to proceed with lease/operations negotiations.|
|District offered a defined benefit pension plan. The plan had a material unfunded liability and full funding for legally terminating the plan would increase the liability/cost||Identified state law allowing use of general obligation “refunding” bonds to pay legal liabilities payable over more than 1 calendar year. Chapter 9 reorganization legally affirms liabilities and sets long-term plan of repayment.||Demonstrated “reasonable” ability to fund District liabilities required by UHS as a condition of closing.|
|Transfer of operations to a for-profit entity triggers remedial action under the tax code as relates to existing District bonds.||District needed to refinance existing bonds into taxable GO bonds. By entering Chapter 9, the District could grant sufficient security to get interim financing arrangements from J.P. Morgan.||District maintained low-cost source of capital.|
|UHS due diligence identified potential OIG claims related to past operations.||Chapter 9 allowed time and funding access for the District to self-report to OIG and to establish full extent of the liability.||Allowed District to reorganize its balance sheet and to fund its net liabilities.|
|Moody’s indicates additional time with cash-flow positive operations necessary for investment grade status.||Board could indefinitely delay the final bond sale until the Moody’s rating increased or sell bonds with a split rating quality.||J.P. Morgan successfully underwrote fixed-rate bonds with the split ratings that achieved the District’s tax rate impact goal.|
Also contributing to this legal update were Chris Janning of Hilltop Securities, Sam Gill of McCall, Parkhurst & Horton LLP and Adam Rudner of J.P. Morgan.
Essential Corporate News: Week ending September 18, 2020
In September 2020, the International Corporate Governance Network (IGGN, published a “Viewpoint” document to provide insight and guidance on what annual general meetings (AGMs) and other shareholder meetings might look like in future, following major changes enabled by emergency legislation in many jurisdictions in the midst of COVID-19 pandemic.